A Chronicle of a Latin American Country Financial Crash: The Case of Venezuela

Abstract

Between 1994 and 1995 the Venezuelan banking system experienced a drastic financial crash that eventually took half of the 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 if they are implemented without taking due care of a fragile institutional setting, the results can be counter-productive.