A CHRONICLE OF A LATIN AMERICAN COUNTRY FINANCIAL CRASH: THE CASE OF VENEZUELA

In: Revista Venezolana de Análisis de Coyuntura; Vol 6, No 2 (2000); 177-208

Abstract

Between 1994 and 1995 the Venezuelan banking experienced a drastic financial crash that eventually took half of the banking industry down, created a wave of bankruptcies of enterprises, distorted .public finances (as government assistance to ailing banks mounted), and generated a balance of payments crisis. This paper details the events that precipitated Venezuela's financial crisis and examines how the problems took shape The paper outlines the factors that cause and precipitate a financial collapse. These are summarized in three broad categories, namely: the macroeconomic context, the institutional setting, and policy orientation. The Venezuelan experience demonstrates that the so-presumed coherence between orthodox reforms and financial liberalization should not be exaggerated. If the reforms itself generate transitory but severe macroeconomic instability and are implemented without taking care of a fragile institutional setting and an already dangerous trend in banking operations, the results can be counter-productive.