UPDATE 4-Venezuela stiffens currency law, threatens brokers

* Bolivar has plunged on free-floating market

* Parallel market is essential to economy, imports
(Recasts with Chavez quotes)

CARACAS, May 13 (BestGrowthStock) – Venezuelan legislators voted on
Thursday to clamp down on foreign exchange trading, while
President Hugo Chavez threatened to close financial brokerages,
which he accuses of undermining the bolivar currency.

Under the newly-reformed law, the central bank will control
the ‘parallel’ currency market where the bolivar has crashed 25
percent against the dollar this year — a move the government
says will end speculation but critics say could wreak economic
havoc.

The law, passed in a second reading, will not take effect
until it is published in the government’s Official Gazette and
may be tweaked before that happens.

The free-floating market is essential to Venezuela’s
economy as it provides currency for about half of imports,
given restricted access to the dollar at two official rates of
4.3 and 2.6 for essential items.

In an evening speech, Chavez warned the brokerages who
operate in the market to step into line with the new rules.

“If we had to eliminate the whole bunch of brokerages and I
don’t know what, well eliminate them, this country does not
need them, we don’t need this savage capitalism of these rich
money-bags,” he said.

Chavez promised stern action last week after the bolivar
slid to 8 per dollar, adding to economic woes including a deep
recession and soaring inflation that are denting his
popularity. [ID:nN09163379]

A senior government source told Reuters on Tuesday that
there were no plans to ban foreign exchange outright in its
present form, via bond trading, but that the government could
try to establish a floor and a ceiling for the bolivar, linking
it to sovereign debt prices traded overseas.

Amid the confusion over what the new exchange regime will
look like, most brokerages have stopped accepting trade this
week.

Analysts warn a prolonged paralysis of the trade could
simply force the creation of a fourth, illegal dollar market,
given high local demand.

“We are of the view that tightening the regulatory grip
over the parallel market … and setting a band will be
self-defeating as FX supply will likely go deeper underground
and emerge somewhere else, probably with an even more
distressed VEF/USD level,” Goldman Sachs analyst Alberto Ramos
said in a research note on Thursday.

The government is determined to strengthen the bolivar’s
rate on the free-floating market in a bid to counter one of the
highest inflation rates in the world.

Consumer prices jumped a record 5.2 percent in April.
[ID:nN07213073], driven by the rising cost of consumer goods in
the import-dependent nation.

Investment Advice
(Reporting by Ana Isabel Martinez and Frank Jack Daniel;
Additional reporting by Eyanir Chinea; Writing by Daniel
Wallis; editing by Carol Bishopric)

UPDATE 4-Venezuela stiffens currency law, threatens brokers