Wall St. not upset by Venezuela forex controls

www.forbes.com Reuters, 01.22.03, 11:57 AM ET  By Hugh Bronstein

NEW YORK, Jan 22 (Reuters) - Investors usually frown on foreign exchange controls because they impede the free market, but Wall Street is not complaining about Venezuela's decision to temporarily close its foreign exchange market.

In Venezuela's circumstances -- with the risk of default rising as its economy contracts -- holders of Venezuela's bonds should not be shocked by the move because it will help ensure that near-term debt payments are met, analysts said Wednesday.

"This should be seen as an attempt by the government to continue to honor its obligations in the short term," said Christian Stracke, lead emerging markets analyst at CreditSights, a Wall Street research firm.

Venezuela on Wednesday said it was closing the country's foreign exchange market for five trading days to stem capital flight spurred by a crippling seven-week opposition strike against leftist President Hugo Chavez.

The bolivar currency has tumbled more than 24 percent against the dollar since the start of this year and 28.5 percent since the strike started on Dec. 2.

When countries get worried about runs on their currencies, foreign exchange controls are sometimes adopted to ration currency sales. The government usually establishes a guide as to who has a priority claim on its reserves.

"In most cases where foreign exchange controls have been put in place, foreign debt payments are at the top of the list," said Jose Cerritelli, a Bear Stearns debt strategist.

"So foreign creditors should not have a knee jerk reaction against these exchange controls because these measures are there to give them a priority claim over foreign exchange reserves," he said.

The Venezuelan Central Bank said that during the five-day closure the government would maintain the necessary operations to make public external debt payments.

"Venezuela's international reserves are there in case of emergency to finance the government's liabilities," Stracke said.

"Right now those liabilities are not just foreign debt payments but also the import of food and gasoline, due to the strike," he added. "With that in mind, the government has to make sure it is not losing its reserves to speculative capital flight."

BUYING TIME, BUT HOW MUCH? "Protecting their reserves buys them a little time, but that's all it does," said Lacey Gallagher, Credit Suisse First Boston director for Latin American economics.

"How much time it buys depends in part on the structure of the capital controls that Venezuela may put in place once the foreign exchange market reopens," she added. "Given the severe underlying problems, the risk of a credit event remains high."

Venezuelan bond spreads, which measure the perceived risk of default compared with safe-haven U.S. Treasury bonds, have ballooned more than 500 basis points to 1439 basis points since the work stoppage began Dec. 2, according to JP Morgan's Emerging Markets Bond Index Plus.

Chavez was elected in 1998 after vowing to wrest control from the country's corrupt elite and enact reforms to help the poor. But opposition has grown amid charges that the president wants to establish a Cuban-style authoritarian state.