Crisis in Venezuela – hyperinflation has begun

Crisis in Venezuela When banknotes are only weighed

<strong>Crisis in Venezuela</strong> When banknotes are only weighed

  • Venezuela faces one of the worst hyperinflations in world history – similar to Germany in 1923.
  • This is not only an economic catastrophe, but also hurts the social cohesion massively.
  • The culprits of the situation – the socialist rulers of the country – are looking for scapegoats.

The tragedy of Venezuela has got another name: hyperinflation. The prosperous and oil-rich country, after a long economic crisis, is likely to reach a one-million percent currency depreciation rate by the end of the year, Alejandro Werner, director of the International Monetary Fund (IMF) for the Western Hemisphere, now summarizes. The already low gross domestic product (GDP) will shrink by 18 percent, after the country suffered a double-digit decline in economic output in 2016 and 2017 already. The collapse of the economy, the scarcity of food and public goods such as health services, electricity, water, public transport, leads to migration flows, which are also the neighboring countries gradually drawn into the crisis, the IMF.

Venezuela thus faces one of the worst hyperinflations in world history. It is only comparable to the great inflation in Germany in 1923 or Zimbabwe in 2009. According to the definition of the American economist Phillip Cagan, from a galloping inflation hyperinflation, when the monthly rate of depreciation exceeds 50 percent, resulting in an annual rate of 13 000 Percent. In Germany, inflation fell in November 1923 to a good 30 000 percent.

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President Nicolás Maduro has now announced a program of “economic recovery” that will start on 20 August. It also planned a “change of funds”: “Five zeros less”. Originally, Maduro had announced the cancellation of three zeros.

The perpetrators of the Venezuelan disaster make it similar to other responsible people before her – they are looking for scapegoats. Maduro, who ruled the country along with a socialist military clique, says his country is in an economic war that the United States has instigated. Protesters who took to the streets against the policies of Maduro, he described as “fascist gangs”.

This economic war does not exist. But it is clear where the causes of hyperinflation are in Venezuela. “Inflation is always and everywhere a monetary phenomenon,” postulated Nobel laureate Milton Friedman once. To say: inflation arises when central banks or governments put too much money into circulation. In Germany, the path to the destruction of the Mark began in August 1914 with the outbreak of the First World War. The imperial government initially financed the war by issuing war bonds and tax increases. However, part of it was raised by money printing, and that part grew larger and bigger over time as the government feared protests and wartime fatigue. After the lost war, the printing press had to work even faster, until in November 1923 a dollar cost 4.2 trillion marks.

Venezuela suffers from “Dutch disease”

Image result for dutch diseaseIn Venezuela, it was not a lost war, but the immense oil wealth of the country that triggered the march into disaster. It all began on December 6, 1998, when Maduro’s predecessor, the charismatic officer Hugo Chávez, won the presidential election in Venezuela. Chávez proclaimed the “Bolivarian Revolution”, which also received enthusiastic approval in the industrialized countries under the name “Socialism for the 21st Century”. The economic kernel of this socialism was to distribute the raw material rent from oil production, that is, what is left over from oil revenues, after deduction of wage and capital costs, to the people, or to be more precise, the supporters of the president.

What happens when you do that, other countries have already gone through. For example the Netherlands. There, natural gas was discovered in the 1960s. The raw material pensions that came into being were used by the Dutch to expand their welfare state. Wages rose, and with them the cost of domestic production, causing Dutch industrial goods to lose competitiveness. As gas prices plummeted, the country plunged into a severe economic crisis. To this day, this crisis is called “Dutch disease”. The disease was not cured until the bargaining parties signed the legendary “Wassenaar Agreement” in 1982, when unions agreed to a wage-with-pay agreement for new jobs.

Economy.- The Catalan crisis and the high debt threaten the stability of Spain, according to Moody's

According to Moody’s, which at the same time warns of that the fulfillment of its fiscal objectives has met the challenges of the Catalan independence crisis and the high level of debt.

This follows from the last annual report on Spain published by the rating agency Moody’s, where it explains that, although Spain will continue to benefit from the favorable ‘wind’ offered by the recovery of the eurozone and its virtuous cycle of employment boost, households, and investment, the continuing political tension related to Catalonia –19.1% of the Spanish Gross Domestic Product (GDP) – will limit the economic activity of the country as a whole, while the high level of debt will continue to limit its credit profile.

“Spain has one of the largest economies in the world and its growth has been one of the strongest in the euro area in recent years,” said senior vice president of Moody’s and analyst and co-author of the report, Sarah Carlson. “That said, the acceleration of its growth has a strong cyclical component and we predict that real annual GDP growth will slow to just under 2% by the end of this decade,” he said.

Spain’s moderate susceptibility to risk is driven by the internal political conflict linked to Catalonia, although Moody’s continues to believe that the likelihood of independence is low. However, he admits that the rapid escalation of tensions, together with the current political stalemate, suggests that the possibilities have increased “somewhat”, as well as its negative implications on the economic environment and for policymaking.

Any resolution that increases the fiscal autonomy 

the Spanish regions could have negative implications for the sovereign issuer, given the challenges that regional finances have represented for the general government’s finances in recent years,” Moody’s argues. On the contrary, a quick resolution of the political crisis could allow the economic and financial impulse to benefit the credit profile.

Catalonia is one of the richest regions of Spain, which represents a very important proportion of national GDP, trade, and foreign direct investment, so the secessionist process will have a “negative and moderate” impact on the economy since Tensions also generate uncertainty about economic confidence and spending on the consumer. Moody’s expects Spanish GDP to grow 2.3% in 2018, in line with the Executive’s forecast.

“The political instability is having a clearly greater negative impact on the Catalan economy, with the confidence of depressed foreign investors and the arrival of tourists on the downside,” he says. According to Moody’s, more than 3,000 companies have moved out of the region, of which around 1,000 have also moved their tax offices. In the hospitality sector, overnight stays by non-residents decreased 4.2% annually in October and November 2017, in contrast to a national expansion of 1.9% in the same period, while retail sales in Catalonia They stagnated during the second semester of 2017.

HIGH DEBT LEVEL

HIGH DEBT LEVEL

 

According to the US firm in its report, the high level of debt in Spain will continue to limit the sovereign credit profile, despite the recent trends of improvement in economic, fiscal and financial data. In this sense, it considers that the structural fiscal reforms and the performance of the budgets of the regional governments will be key factors to improve the variables of the deficit and the reduction of the debt.

“The fiscal dynamics of Spain continues to be a challenge due to a series of structural weaknesses, among which the imbalance of the Social Security system is included,” he said in the document, which also refers to private debt. “There has been a significant deleveraging of the private sector in general, but household debt is still relatively high,” he says. Moody’s considers that there has been a change in the composition of the debt of the Spanish economy, with a shift from the private sector to the public.

RESTRUCTURED BANKING SECTOR

RESTRUCTURED BANKING SECTOR

 

The solid economic recovery of Spain has allowed to rebuild the credit fundamentals, especially the quality of assets, of the country’s banking entities. “The Spanish banking sector has been restructured, with higher capital ratios and stronger financing structures,” Moody’s states in its report.

Similarly, it welcomes the fact that the governance, regulatory and supervisory frameworks have also been revised and improved, especially with the introduction of the Single Supervisory Mechanism (MUS), which carries out the supervision of the thirteen largest banking groups in Spain.

However, he explains that the stock of non-performing loans from Spanish banks remains high, although he points out that it has been gradually decreasing since it peaked at the end of 2013- most of my research from here. “Banks will continue to reduce their reserves of problematic assets, and The decline will be accelerated by large portfolio sales, such as those announced last year by Banco Santander and BBVA, “he says.

 

POPULAR RESOLUTION

POPULAR RESOLUTION

 

In June 2017, Banco Popular became the first bank to be resolved by the Single Resolution Board (SRB) of the European Union, created in 2015 to minimize the financial impact of bank failures on taxpayers. “Popular’s resolution, under which it was acquired by Banco Santander at the symbolic price of 1 euro, is consistent with the EU Banking Resolution and Recovery Directive (BRRD), which restricts the use of public funds to rescue bankrupt banks. “, underlines Moody’s.

In sum, the agency believes that the Government of Spain will not have to provide more material support to the country’s banking system, with the exception of Sareb, the bad bank that assumed 50,500 million euros in real estate assets with problems of the country’s banks. 2013

“The size and evolution of this contingent liability will depend to a large extent on the evolution of the Spanish property market,” Moody’s concludes. “There is a possibility that, in the unlikely event that Sareb has additional capital needs, the government may be the only entity willing to support it, but we also recognize that Sareb has 15 years to dispose of its assets, so therefore, the additional capital requirements are not likely to materialize in the short term, “he concludes.