Venezuela Defaults on Gold Swap with Deutsche Bank

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Venezuela Defaults on Gold Swap with Deutsche Bank

By John McDonald

Venezuela is falling apart at the seams. After defaulting on its dollar-denominated bonds less than two years ago, the economic implosion of President Nicolas Maduro’s regime continues to accelerate.

The latest example of the economic carnage is the Latin American country’s default on a financial transaction with Deutsche Bank AG, a huge bank and financial services company headquartered in Frankfurt, Germany. Just a few years ago, in 2016, the government of Venezuela sought and received a loan from Deutsche Bank AG. But Venezuela was already in bad shape at the time, and Deutsche Bank did what any wise lender would do: They demanded collateral.

The best collateral on offer from the Venezuelan government was very desirable: gold. To secure the transaction, Venezuela turned over 20 tons of gold to the huge German lender. Venezuela would have until 2021 to repay the loan, at which time the gold would be returned.

The loan was not repaid. Bloomberg reports that, due to missed interest payments that Venezuela was obligated to pay, Deutsche Bank AG exercised its authority to take ownership of the gold as payment for Venezuela’s outstanding debt.

In that moment, Venezuela’s gold reserves dwindled to only $7.9 billion, a low point not seen in 29 years. They have since dropped lower, hovering around $6.8 billion presently, almost exactly half of the more than $13 billion of gold held by the Venezuelan government as recently as late 2015.

The Venezuelan government is on a financial path that can only be described as bad and rapidly getting worse. Indeed, Venezuelan inflation achieved a dubious distinction in May: That was the first month all year during which the Venezuelan inflation rate has been below one million percent, solidly placing President Nicolas Maduro’s economic results in the same league as the hyperinflationary hell created by Robert Mugabe in Zimbabwe.

The damning comparisons continue. If the downward spiral continues – and there are no signs suggesting it will slow – then Venezuelan currency is likely to meet the same fate as German money during the early 1920s: It was literally worth less than dirt and was used as kindling.

This is nothing short of astounding, consider that Venezuela has more proven oil reserves than any country on earth, including Saudi Arabia, but the Maduro regime has failed so miserably that oil output levels are below where they were in 2015 because the country’s oil extraction infrastructure has not been properly maintained.

For Venezuela, the “chickens” of socialist policies, rigged elections and absolute corruption are coming home to roost. It seems only a matter of time that Venezuela’s final $6.8 billion in gold reserves will be lost, costing the once enviable economy what little hope that remains of economic renewal.


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