MercoPress. South Atlantic News Agency

Desperately dollar-short Venezuela planning gold reserves swap operation

Opposition leader Capriles who released the news said it was supplied “by friends inside government”

Venezuela is evaluating a swap agreement involving gold reserves as a way to fortify dollar supplies in a country which suffers chronic product shortages and inflation close to 55%. Opposition leader Henrique Capriles said last week that the government was negotiating a swap operation with Goldman Sachs involving 1.45 million ounces of gold worth around 1.86 billion dollars.

 “The most logical thing would be a swap,” said a senior Venezuelan government source but “we haven't finished anything yet. But if there's an opportunity to do something, it could be done.”

Asked if Venezuela would be willing to carry out such a transaction, the source said: “That would depend on the cost and financial conditions.”

Such an operation would effectively allow the country to borrow against the value of part of its gold reserves, using them as collateral and paying interest to the bank. According to Capriles the repayment would take place between 2016 and 2020, who admitted having access to the information “from friends inside government”

Capriles also said last week that the government was planning an operation in which Bank of America could help pay off debts to foreign suppliers who now have billions of dollars in pending invoices due to payment delays caused by the country's decade-old currency controls. Bank of America would cancel 3bn dollars in Venezuela's central bank pending debts with importers for which it would charge a handsome commission.

Bloomberg reported on Wednesday that Goldman proposed a swap that would provide 1.68 billion in cash and be backed by 1.85 billion of the central bank's gold (approx 47 tons), generating some 818 million in financing costs over seven years.

Bank of America would pay Venezuelan companies less than the official exchange rate for bolivars, Bloomberg said, letting the central bank avoid directly dealing at an exchange rate weaker than the official one.

Venezuela's currency controls, which fix bolivars at 6.3 per dollar even though they fetch 10 times that on the black market, has built up large debts with businesses that are struggling to meet import needs for lack of hard currency.

In recent months, the country has suffered from shortages of goods ranging from corn flour to toilet paper amid a tumble of 18% in its international reserves over the last year to 20.694bn dollars. Besides Venezuela is facing debt service payments of 40bn dollars in the next four years.

About 70% of Venezuela’s foreign reserves are in gold. Former President Hugo Chavez, who died of cancer in March, secured Venezuela’s patrimony by repatriating its gold reserves from the Bank of England. The move was believed to be an effort to move away from what he called the “dictatorship of the dollar.”

From 1999, Chavez’s first year in office, through 2012, Venezuela bought 75.3 metric tons of gold, according to data on the International Monetary Fund’s website. Those purchases cost a billion dollars based on average annual gold prices and would be valued at 3.03 billion at today’s price of $1,251.96 an ounce, meaning the additions would have made 2.03 billion. The country also sold 13.1 tons of bullion during that period, the IMF data show.

Venezuela’s gold reserves total 367.6 tons, making it the 14th largest holding by country, according to the World Gold Council. Gold accounts for 70% of the nation’s foreign reserves, compared with 7.6% for Argentina and less than 1% for Brazil.