Chavez responds to 'threats'
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Chavez responds to 'threats'

Venezuela liquidates US treasuries

The revelation this week that the Venezuelan central bank had liquidated around $14 billion worth of its US treasuries over the past 4 months contributed to dollar falls against the euro and other currencies and sparked feverish speculation over President Hugo Chavez's intentions. About half of Venezuela's $30 billion foreign reserves are now deposited at the Bank for International Settlements, in the form of dollar-denominated certificates of deposit (CD's).

Morgan Harting, a Latin America analyst at Fitch Ratings, told Emerging Markets that the transfer was 'largely symbolic.'

'It's a move from one dollar denominated asset to another dollar denominated asset. It's not changing the balance sheet of the Venezuelan central bank all that much. Nor will it have any effect on the US government's ability to finance itself, though a move into euro or yen assets might have a marginal impact' he said.

Domingo Maza Zavala, one of seven directors of the Venezuela's central bank, explained the sell off in an interview with the Financial Times. He sought to stress that the move was financial, rather than political. 'It was considered convenient to deposit a substantial proportion of the reserves in Basel (at the Bank for International Settlements).'

He told Bloomberg that the country could now invest the CD's in Chinese yuan, Japanese yen and euros in order to diversify its holdings.

But Harting believes that this again brings the independence of the Central Bank into question: 'The central bank is considerably less autonomous than it was five years ago. Recent decisions (including investing in Argentinian and Ecuadorean securities) have been rooted in politics.'

President Hugo Chavez announced the liquidation several days before it was verified and told Venezuela's El Nacional newspaper that the selling of US assets was in response to 'the threats we've received.'

The jittery reaction of the markets reflects broader unease about shifts in the composition of foreign reserves. A similar move against dollar assets in Asia could further test confidence in the dollar's durability.

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