August 17, 2011 / 7:40 PM / 9 years ago

Critics raise alarm over Venezuela reserves plan

* Plan would move reserves from Western banks

* Could weaken market confidence in debt repayment

By Louise Egan

CARACAS, Aug 17 (Reuters) - A reported plan to shift Venezuela’s international reserves from Western nations to political allies could hurt market confidence in President Hugo Chavez’s ability to repay debt and has prompted a flurry of speculation about his motives.

An opposition lawmaker said on Tuesday that Chavez’s top finance officials recommended the government repatriate almost all the country’s $11 billion in gold reserves held abroad and up to $6.3 billion in liquid reserves from the United States and Europe to banks in China, Russia and Brazil.

Julio Montoya, the legislator, cited a document leaked to him and later posted online that appeared to have been prepared for Chavez by Finance Minister Jorge Giordani and Central Bank President Nelson Merentes. The Finance Ministry and the central bank declined to comment.

It is not clear if Chavez has approved the plan, but in a related announcement on Wednesday Chavez said he would nationalize Venezuela’s gold sector as a way of boosting domestic reserves. [ID:nN1E77G0WN]

Rodrigo Cabezas, a former finance minister under Chavez, said the government was progressively moving toward holding the majority of its reserves at home in gold.

“For some time there has been a decision ... that monetary gold, counted as a reserve, would come to the country, to the central bank vaults, on the basis of security, transparency and protection of an important component of the reserves,” Cabezas told state television on Wednesday.

Venezuela uses its reserves primarily for debt payments and for financing imports. The U.S. dollar is widely seen as the global reserve currency of choice, despite recent economic woes.

“We think the market would view such an asset transfer negatively, as it could weaken confidence regarding backing for future external debt payments,” Casey Reckman, an analyst with Credit Suisse, said in a research note on Wednesday.

Reckman and other Credit Suisse economists met Merentes and other officials in Caracas last week and said they got the sense there were no major economic policy changes coming.


Chavez, who is recuperating from treatment for cancer and aims to win another six-year term at an election next year, has railed against reliance on the U.S. dollar during his convalescence.

Investors tend to take his musings seriously, due to the 57-year-old socialist leader’s track record of radical moves including the nationalization of much of the economy and his courting of anti-Western regimes including Libya and Iran.

Some critics speculated Chavez might be worried that possible political violence around next year’s vote could trigger international sanctions. If Chavez opts not to accept defeat, they argue, he is better equipped to withstand the condemnation if he has control of all the country’s cash.

Asdrubal Oliveros, of local think-tank Econanalitica, called the reported reserves plan “imprudent, to say the least.”

“There are no technical motives, only political ones. The government looks at Libya and sees itself in the mirror,” he said.

The leaked document on the changes to the reserves, which totaled $29.1 billion as of Aug. 8, suggests carrying out the transfers over a two-month period and not selling any gold for now. It acknowledges that the currencies of Russia and Brazil do not technically qualify as reserve currencies.

The text also reveals a fear in Chavez’s inner circle that the United States could seek to freeze Venezuelan reserve assets, perhaps due to ongoing disputes over nationalizations.

“The Federal Reserve must be informed of any electronic operation involving the U.S. dollar. ... Therefore, it may have a say on the destination and purpose of funds, in other words it can ‘freeze’ dollar resources,” the document says.

Venezuela, an OPEC nation, mostly repays its loans from China and Russia with oil, but has been issuing bonds at a quickening pace recently. Analysts warn it could become harder to repay that debt in coming years, especially if oil prices fall.

About two-thirds of Venezuela’s total reserves are in gold, of which $11 billion is abroad and $7 billion in the Venezuelan central bank, the leaked report said.

Of the liquid reserves, it says 68 percent are in U.S. dollars and 32 percent in euros and sterling. Only 11 percent of the total are actually held in U.S.-based banks — $5 million with the Fed — while nearly 60 percent are with the Bank for International Settlements in Switzerland. (Additional reporting by Eyanir Chinea; Editing by Daniel Wallis and Leslie Adler)

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