One would hope that Venezuela’s central bank will decline from taking up Hugo Chávez’s kind offer of storing in the presidential palace some of the $11bn of gold that he wants to repatriate if there isn’t enough room in the bank’s vaults.

But Standard & Poor’s downgraded Venezuela on Friday anyway, highlighting the level of political risk in general that imperils the country’s credit.

Indeed, whether or not the central bank takes up Chávez’s offer, Venezuela’s gold reserves probably aren’t much safer elsewhere, given its almost total lack of independence from the executive.

The government began inventing excuses for raiding its reserves as long ago as 2005, when an arbitrarily defined “optimal” level of reserves was enshrined in law, with the “excess” amount to be transferred twice a year to an opaque executive-controlled fund known as Fonden.

Although Chávez’s surprising decision to repatriate gold reserves stashed abroad was not cited as the main reason for S&P’s downgrade, it is certainly a prime example of the political uncertainty that is its chief concern, as opposition politicians made abundantly clear in an impassioned parliamentary debate Thursday night.

“You will liquidate the gold and sell it because the only thing you know how to do is rob, rob, rob!” thundered opposition deputy Miguel Ángel Rodríguez, arguing that with presidential elections at the end of next year, the government is going to try to lay its hands on all the money it can to buy votes.

A further clue that supports the argument that Chavez wants to cash in some of his gold reserves is that he is also about to nationalise domestic gold production, in order to boost reserves.

As BBO, a Caracas investment bank, argued in its weekly report released today:

In the end, the decision and the lack of a plausible financial or administrative reason for it simply adds to the confusion and appearance of improvisation on the part of Venezuela, which simply adds to the country’s credit risk and thus, financing costs. When transparency is already in question, a decision like the one to move the international reserves, without a serious explanation, simply obscures even more the management of the country’s finances and sends a warning to potential investors.

Chávez may be reclaiming his gold for political reasons – namely he is worried that sanctions against Venezuela triggering a freeze of its foreign assets – but this will come at a considerable financial cost.

Related reading:
Venezuela: plans to move foreign reserves from “imperialist” vaults, beyondbrics
Traders prepare for Chávez gold transfer, FT
Gold standards, Lex
Venezuela: vanishing foreign reserves, beyondbrics

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