Currencies, Emerging Markets, Frontier Markets, Metals

Venezuela Is So Broke That It Can’t Even Afford To Print Its Own Money

Bolivar1Venezuela’s crisis seems to deepen each passing day while its economy crumbles.

The crisis is on two fronts: economical and political.

Both crises combined and compounded by a plunge in oil prices have created a “perfect storm” that has engulfed the South American nation.

Venezuela relies heavily on oil, which accounts for 95 percent of foreign currency earnings as its economy produces little else for exporting.

The evidence of the toll that the oil crisis and encompassing perfect storm have taken on the economy is clearly visible throughout the nation. Shelves at grocery stores are nearly bare as long lines cue outside with shoppers hoping to get their hands on anything, consumer prices rise daily amid a collapsing currency and hyperinflation, and as social unrest spawns protests and violence that is growing rampant.

In 2015, Venezuela’s official inflation rate surged to 180.9 percent as the economy sank 5.7 percent, according to Central Bank data… data that is highly debated and scrutinized.

The IMF believes that Venezuela’s inflation clocked in at 275 percent last year and is set to surge to 720 percent this year.

The IMF’s 2016 estimate of Venezuela’s inflation is nearly quadruple the median 184 percent estimate from 12 economists surveyed by Bloomberg in late January, and exceeds the highest forecast of 700 percent from Nomura Securities.

Barclays has argued that Venezuela’s economy fell 9 percent last year with inflation exceeding 1,000 percent.

In January, Venezuela’s president Nicolás Maduro declared a national emergency as economic conditions continued to deteriorate.

Fast forward a few months and things have gotten worse. Now, as inflation continues to rocket in Venezuela, a simple bank note is as worthless as toilet paper, and as prices continue to soar the government must print more and more money, thus intensifying its neck breaking hyperinflation.

Citizens in Venezuela now need to carry backpacks or duffle bags around town for even the most simple daily activities, such as going out for grocery shopping or to get a bite to eat at a restaurant.

Could you imagine if you needed to put a down payment on a car or house?  One would need a U-Haul truck.

The money printing of Venezuela’s currency, the bolivar, has become so out of hand that the nation can no longer maintain its printing operation on the domestic front and was forced to outsource.

And outsource it did, tasking its bank note printing to several global firms.

In February, thirty-six 747 cargo planes fully loaded with at least 5 billion Venezuelan bank notes landed at Simón Bolívar International Airport in Maiquetía, about 21 kilometers from downtown Caracas, according to The Wall Street Journal (WSJ).

But the Venezuelan government isn’t finished just yet with its printing operation, and is likely just getting warmed up.

According to the WSJ, in December, Venezuela’s Central Bank began “secret negotiations” to order an additional 10 billion bank notes, which would effectively double the amount of hard cash in the nation’s circulation.

But the huge order for 10 billion bank notes wasn’t able to be satisfied by a single firm, as the WSJ reports:

According to the people familiar with the deals, the companies include the U.K.’s De La Rue, the Canadian Bank Note Co., France’s Oberthur Fiduciaire and a subsidiary of Munich-based Giesecke & Devrient, which printed currency in 1920s Weimar Germany, when citizens hauled wheelbarrows of cash to buy bread. More recently, the German technology company was the source of security paper for Zimbabwe when it was stricken in 2008 with a hyperinflation episode in which prices doubled daily….The Venezuelan central bank’s latest orders have been exclusively only for 100- and 50-bolivar notes, according to the seven people familiar with the deals, because 20s, 10s, 5s and 2s are worth less than the production cost.

And you thought the U.S. Fed and ECB were crazy with their money printing presses?

In comparison, this order alone is well above the eight billion bank notes that the Fed and the ECB each print annually, as mind-boggling as it may seem.

Venezuela placed the massive order for 10 billion new bank notes, collected the mountains of cash from the fleet of 747 cargo planes, and… failed to pay? No!

Imagine that.

Now after putting its printing presses into warp-speed, the world’s leading commercial banknote printing house, De La Rue, is demanding that the Central Bank of Venezuela (BCV) pay up the $262 million that it owes.

In a letter last month, De La Rue Director Ruth Euling told BCV Director José Khan that being a public company listed on the London Stock Exchange (LSE), the institution has an obligation to declare their financial position “if at any time it deviates from expectations.”

She added that De La Rue is obliged to publish its detailed financial statements at the end of its fiscal year.

“If there is any possibility of not getting paid before this date, it would impact our financial position and we are under the obligation to inform our shareholders and the authorities that regulate the LSE through a public announcement,” Euling said in her statement.

“We wish to express our deep concern regarding the current debt of the BCV with De La Rue, and the serious consequences it could have for both institutions if left unresolved for much longer,” she said.

To resolve the situation as soon as possible, and to avoid problems with its financial statements, De La Rue proposed that the BCV to remedy its outstanding debt of $71 million prior to March 24.

She also proposed covering “the guarantees currently open in the amount of $97 million for contracts related to the paper money and passport supply, which have already been delivered and accepted in accordance with the respective contracts.”

It is unknown whether the BCV debt with De La Rue was honored before March 24, but its failure to pay on a regular basis is an example of how deep the crisis in Venezuela has become when the government can’t even pay for its own printed worthless money.

To make matters worse, Venezuela’s currency reserves have been continuously dwindling as the nation has exported large sums of gold to Switzerland (1, 2, 3, 4).

What will happen the next time the nation’s sovereign debt is due? Stay tuned!

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