An e-mail friend just sent me this report in the IHT and added his question "What exactly does this mean?" Well here's the full report pasted, and underneath is my reply to him (as it's a quiet day, let's do this "discovered mailbox" thing again). The moral of this story is that finance-world people sometimes talk funny, but the logic is translatable.
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
CARACAS, Venezuela: Venezuela plans to take steps to curb a 6.5 percent decline in banking-related activity during the first half of this year.
Finance Minister Ali Rodriguez says some local banks are holding financial securities without the cash required to back them up while others are not meeting lending requirements.
Rodriguez denied on Thursday the banking system is nearing crisis, but said measures "to clean up the financial sector" will soon be announced by President Hugo Chavez's administration.
The Central Banks says banking-related activity has declined by 6.5 percent during the first six months of 2008 compared with the same period last year.
Rodriguez also says some banks are holding risky financial securities.
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Dear XXXXX,
It means the banks are storing dollars and by design putting pressure on the Bolivar.
If you have a dollar and you can exchange it on the parallel market at 3.8, but you're pretty sure you can get 4.2 for it next week...what do you do? Sell your dollar or buy another one? Yep, you buy another one, cos you want to double your profit from now to next week. And if you know your friends in other banks are thinking the same way, that "pretty sure" becomes "nailed on certainty".
So the bank can't meet its reserve requirement (i.e. the physical cash in the tills and the safes and whatnot) because all the VEFs are being tied up...they've been used to buy dollars.
Therefore what Rodriguez is saying to the banks here is, "Look, I know what your game is....either back off voluntarily now and stop whacking on the VEF, or I'm gonna get busy on your tushes."