Veneconomy: Chavez and ALBA in Venezuela -- From One Absurdity To The Next

The Editors of Veneconomy analyze Venezuela's Bolivarian Alternative for Latin America (ALBA) as a counterweight to the G20 Economic Summit in Washington, where Chavez called for Ecuador, Venezuela and others to default on their "illegal" debt and create a common currency zone -- not to mention taking over CAF's building in Caracas.

From the Editors of Veneconomy:

Dmitri Medvedev, Peter the Great, and the Russian fleet overshadowed the Extraordinary Summit of the Bolivarian Alternative for the Americas (ALBA) called by Hugo Chávez to compete with the last meeting of the G20 in Washington.

The proposals and decisions that emerged from this ALBA Summit are so absurd that they are worthy of comment.

One is the decision by Venezuela and its ALBA pals to support the default Ecuador plans to declare, even though this decision does no good either to Ecuador or to the other ALBA countries. By declaring this default, Correa would cut of his country from access to international financing for decades. Five years ago, Argentina took a similar decision and, were it not for the petrodollars that Chávez has “facilitated” the Kirchners, Argentina would not have been able to obtain access to any international financing whatsoever since then.

Unfortunately, Ecuador’s decision not to honor its liabilities has implications for Venezuela. It so happens that $800 million of Ecuador’s debt is tied up in structured notes, where one of the conditions for their issue was that Venezuela would respond for those $800 million in the event that Ecuador failed to do so.

On top of that, Chávez announced that he would also study the legitimacy of Venezuelan debt and did not discard the possibility of taking a similar decision to Ecuador’s. If he does, Venezuela will also find its access to fresh international credit shut off at a time when the national budget contemplates borrowing to the tune of some $12.3 billion, $7.3 billion of which is new borrowing and $5 billion the renewal of debt that matures next year.

Another absurdity that emerged from the ALBA Summit is the proposal of a common monetary zone, with the purpose of making the region commercially independent. Apparently, the proposed common currency would be similar to the euro, possibly seasoned with a Bolivarian system of barter.

But, if the idea is to establish a common currency, the first thing that has to be done is to implement harmonized monetary and fiscal policies, including a free exchange rate and a free trade policy. Yet, Venezuela, the country proposing a single currency for the region, is also the promoter of indiscriminate controls within its own borders, from the rationing of foreign currency by Cadivi to out-and-out protectionism, which is on the increase.

Although it should be clear to the heads of state who attended the ALBA Summit how absurd and ridiculous Chávez’s proposal are, it seems that access to petrodollars has clouded their judgment, as the four presidents formed an accompanying band to Chávez’s tune and applauded like seals.