How Risky is Venezuela’s Bank Nationalization?

Hugo Chávez has done a lot of things to endanger the Venezuelan economy. But to read John Lyons in the WSJ today, one of the worst and riskiest is his decision to nationalize Banco de Venezuela, which the then-government sold to Santander in 1996 for $300 million.

The deal is a great one for Santander, which has made billions of dollars in profit from the bank and is selling at pretty much the top of the market. It also makes sense for Venezuela, which will now control an important means of distribution of wealth and also a bank which already holds a very large quantity of government deposits. Bank nationalizations are pretty standard things for left-leaning governments: Francois Mitterand nationalized every bank in France not so long ago.

Yet here’s how Lyons starts his piece:

Venezuelan President Hugo Chávez has made nationalizations a centerpiece of his decade-old administration. But his decision to take over a unit of Spanish giant Banco Santander SA carries a new set of risks, touching on local confidence in the banking system.

Banking affects Venezuelans more personally and immediately than oil, telecommunications and other strategic industries in which Mr. Chávez has intervened. The move could backfire if depositors lose faith in the government’s ability to protect their savings, and yank their money.

In Venezuela, as in many Latin American nations, mass withdrawals at one bank have a way of snowballing into a systemic bank run that puts the economy and political system in play.

Mass withdrawals? Systemic bank runs? This is alarmist stuff, which Lyons admits, later on, is based on nothing but sheerest speculation.

Lyons does at least attempt to address the obvious problem here, which is that state-owned banks are safer than their privately-owned counterparts, not more risky:

While in the U.S. the government is seen as a guarantor of bank stability, nationalizations are viewed with deep skepticism in many Latin American nations, where official corruption and incompetence are pressing issues. Many Venezuelans already blame government mismanagement for a host of problems ranging from food shortages to the declining productivity of the oil industry.

"Chávez said the bank’s deposits will now be in the government’s hands, but the problem is there may be people who think that’s not such a good thing," said Alejandro Grisanti, a senior Latin America economist who follows Venezuela at Barclays Capital Inc.

I’m sure most people agree that Banco de Venezuela will make less money in public hands than it did as a private corporation. The Venezuelan masses are likely to consider that a good thing; the elites might not like the idea of directly funding the government with their deposits, and there is a risk that they’ll move their money elsewhere in protest, but I don’t think that there’s any risk of a fully-fledged bank run. Besides, if the deposits ended up in other, privately-owned, banks, how could that kind of transfer "snowball into a systemic bank run" affecting all banks? Lyons never says.

Besides, as any Argentine will tell you, having your money at a privately-owned bank is not going to protect you from governmental incompetence, mismanagement, intervention, or outright confiscation, should the government be so inclined. If Chávez ever wanted to freeze or seize bank deposits, he could do so whether or not he owned the banks in question.

So I’m not nearly as down on this nationalization as Lyons is. Chávez seems to be paying the full market price for Banco de Venezuela, and deposits there will be just as safe as they ever were, if not safer. There are lots of decisions that Chávez is making which are likely to be very bad for the Venezuelan economy. This one, I think, comes quite a long way down the list.

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