Earlier this week we wrote in a research note:



"The market flutter caused by the unilateral debt moratorium by Dubai suggests to us is that the illusion of stability created by the Federal Reserve Board over the past year is starting to dissipate. Specifically, there are many Dubai type situations in the global markets, both sovereigns and corporates, that are over-extended and are unable to service their debts at par. The corporates will end up in restructuring but the sovereigns are an open question."



"We would not be surprised to see more sovereign debtors make unilateral announcement of debt moratoriums and/or restructurings, perhaps including even oil rich Venezuela. We notice in that regard that Venezuela’s lider maximo, Hugo Chavez, is preparing to nationalize the few remaining private banks of that nation, usually a good indicator of an approaching sovereign default."



I have been following VE, both as a journalist and professionally, for many years. While Chavez does have a reasonably tight grip on the security situation, c/o his Cuban trained praetorian guard, the economy is a mess, even with plentiful oil. Indeed, not only has Chavez managed to wreck the state oil company so that VE barely meets half of its OPEC production quota, but inflation is running wild.

The Chavistas thought that oil prices would stay near the highs of the past two years, a dream that they share with the rulers of Dubai it seems. But with oil below $100 and the political opposition in VE starting to get organized, it may be time for Chavez to go for the whole ball game, nationalize the banks and take control over the rest of the economy that the government does not already control. Keep an eye on VE as the next soveriegn flash point.

As the WSJ reported today: "Upping the ante significantly, Chavez said he would not hesitate to intervene in the country's whole banking system. "You can be sure that if I need to intervene in all the banking system, I will do it," the self-declared socialist revolutionary said in a televised address Wednesday."

Chris