Devaluation Sparks Chaos in Caracas

by John Lyons and Darcy Crowe
The Wall Street Journal
January 11, 2010

CARACAS — President Hugo Chávez’s decision to devalue Venezuela’s bolivar and impose a complicated new currency regime may paper over some growing cracks in the economy, but it is also setting the stage for bigger problems down the road for the country’s oil-rich nation and its populist leader.

Over the weekend, there were signs that Mr. Chávez’s slashing of the “strong bolivar” currency could create as many problems as it solves in Venezuela’s economy, provoking a wave of anxiety that sent Venezuelans scurrying to spend cash they feared could soon be worthless…

…On Sunday, Mr. Chávez vowed to fight speculation and price increases that could result from the devaluation, which raises the price of imports.

Harried by recession and sliding popularity, Mr. Chávez on Friday weakened the bolivar to 4.3 per dollar from 2.15 in a bid to shore up government finances, which have been hit by weaker oil prices, and to stimulate economic growth ahead of key elections.

In order to protect the poor, his main constituency, from the move, Mr. Chávez announced the creation of another exchange rate of 2.6 bolivars per dollar for imports of food, medicine and other essential goods. Those rates will compete with a black-market rate, where the bolivar had plunged, forcing the official devaluation. On Friday, that black-market rate stood at about 6.25 per dollar…

The article continues at WSJ.

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