Venezuela's Overnight Rate Surges as High as 120%

By Alex Kennedy

Sept. 6 (Bloomberg) -- Venezuela's interbank overnight rate soared to as high as 120 percent after the central bank said it would halt some of its lending operations to financial institutions.

The rate closed at 30 percent, up from an average daily rate of 8.7 percent since Aug. 1, traders said. Banco Central de Venezuela suspended its repurchase agreements yesterday, three days after President Hugo Chavez prodded policy makers to stop acting as an ``oxygen tank'' for banks that needed cash.

The cutback in lending is part of Chavez's effort to take greater control of the central bank and the South American country's economy. Chavez has taken $17 billion of foreign reserves from the bank to fund government spending in the past two years and is seeking to reform the constitution to strip the bank of its independence from the executive branch.

``They're just reacting to Chavez's orders,'' said Miguel Octavio, executive director of Caracas-based brokerage Bbo Servicios Financieros Inc. ``Why change the constitution when it's clear the central bank is not independent?''

Chavez, 53, has taken over much of the central bank's duties in recent years. He imposed restrictions on foreign-currency trading and set a fixed exchange rate in 2003 and established maximum lending rates banks can lend at and minimum rates they can pay depositors in 2005.

Bolivar Gains

The bolivar strengthened in black market trading today as some banks sold dollars to cobble together the bolivars they needed. The currency rose 2.1 percent to 4,775 bolivars per U.S. dollar in the parallel market, traders said.

``There's just no liquidity in the market right now,'' said Richard La Rosa, a trader at brokerage ActiValores Sociedad de Corretaje SA in Caracas.

The government pegs the bolivar at an official exchange rate of 2,150 under the restrictions Chavez imposed in February 2003. Venezuelans turn to the unregulated market when they can't get approval from the government to buy dollars at the official exchange rate.

Chavez may have been looking to drive up the bolivar when he pushed for the cutback in central bank lending, said Rufino Gonzalez, a director at Caracas-based brokerage Fidevalores Sociedad de Corretaje de Titulos Valores SA.

A stronger black market bolivar and higher interbank rates may help curb inflation, Gonzalez said. Annual inflation was 16 percent in August, the highest rate in Latin America, after Chavez used record oil proceeds to triple government spending over the past four years.

`Caught Off Guard'

The central bank at times used the repurchase agreements, or repos, to provide cash to the banking system. The bank said in its statement yesterday that it will continue some lending operations, such as its role as lender of last resort.

``What's impacting the market is the suddenness of the decision to shut down those particular operations,'' Octavio said. ``Some small banks got caught off guard.''

The overnight rate rose from an average of 22 percent yesterday, according to the central bank. Octavio said he expects the rate to return to normal levels in coming days.

Government debt sales this week also drained money from the financial system, adding to the cash crunch, La Rose said.

The government sold about $200 million of dollar bonds from its portfolio in a private placement with local investors, 215 billion bolivars of 5-year bonds and 50 billion bolivars of 91- day debt earlier this week.

To contact the reporter on this story: Alex Kennedy in Caracas at akennedy1@bloomberg.net