Chavez orders money changer raids for FX crash

Reuters (Link) - Frank Jack Daniel (May 15, 2010)

Venezuela�s President Hugo Chavez said on Friday authorities were set to raid money changers and close websites listing exchange rates, his latest bid to stop the crashing bolivar currency.

Venezuela�s foreign exchange market is already paralyzed after the government moved to end speculation and stem the fall of the bolivar with new rules some economists fear will cause economic turmoil.

Under a reform passed by legislators on Thursday, the central bank will oversee all transactions in the market where the bolivar is traded freely via securities.

Fitch Ratings said on Friday that Venezuela�s new laws governing foreign exchange trading could hurt growth prospects and stoke inflation, compromising the government�s ability to service its debt.

Chavez threatened to close all the country�s brokerages and financial trading houses after the bolivar lost 25 percent against the dollar this year.

Friday�s raids appeared to be limited to small illegal money changers in Caracas.

�The first raids should be starting, money changing houses, illegal dollar sales where they say they sell gold,� Chavez said in a meeting with governors. �We are battling a mafia...I said before, we are going to give them the mother of all blows.�

Caracas has a number of downtown money changers who operate on street corners and in small offices in an area known for its gold trade.

The weak bolivar is raising the cost of consumer products in the import dependent country and helped drive inflation to 5 percent last month. Economic problems are hurting Chavez�s ratings ahead of September legislative elections.

A senior government source told Reuters on Tuesday that there were no plans to ban foreign exchange in its present form, via bond trading.

In addition to the currency market, Venezuela has two fixed rates of 2.6 and 4.3 bolivars to the dollar. Under the new rules the central bank is likely to seek to establish a floor and ceiling for the bolivar market and may link it to sovereign debt prices traded overseas.

A popular blog, Dolar Paralelo (bonosvenezuela.blogspot.com/) disappeared from the web on Friday evening after Chavez warned of impending legal actions against sites he said promoted illegal dollar trading.

�The dirty market, because it�s racist to call it black, why don�t we say white? Dirty market, illegal dollar market,� he said.

Chavez introduced rigorous currency rules in 2003 to stop capital flight after a political crisis. A loophole allows some currency trading via bond swaps and similar mechanisms.