Venezuela turns to Citibank for financing

Venezuela has turned to Wall Street to help it secure US dollar funding as the country struggles with an economic crisis that has left it struggling to pay for essential items such as food, medicine and even toilet paper.

The country's central bank has swapped part of its gold reserves for $1bn in cash through a complex agreement with Citi, according to people familiar with the transaction.

The deal will provide much needed foreign currency for the socialist government of President Nicolas Maduro as it grapples with soaring inflation, chronic shortages of every day items and an economy that is shrinking because of falling oil prices.

It comes after President Barack Obama called the Latin American country a national security threat in March, restricting travel and freezing the assets of some Venezuelans. These moves came shortly after Venezuela ordered Washington to slash its local diplomatic staff.

The precise structure of the deal is unclear but, according to recent media reports, Caracas has pledged 1.4m troy ounces of gold - the equivalent of 3,500 gold bars or 14 per cent of the UK's gold reserves - in exchange for about $1bn in cash. Venezuela will also pay interest on the funds, the reports said.

At current prices, the bullion is worth almost $1.7bn, providing Citi with a cushion should prices fall. Gold has fallen 36 per cent since reaching a peak in 2011 but is up 1.8 per cent so far this year to around $1,200 a troy ounce.

Citi declined to comment on the deal.

Venezuela has the world's largest oil reserves but its economy is forecast to shrink by 7 per cent this year while inflation is expected to top 150 per cent, fuelled by printing money to fund a fiscal deficit estimated at 20 per cent of gross domestic product.

At the same time, its currency reserves have been falling - with the country's international reserves hitting a 11-year low of $19bn in April. Some $14bn of that is held in gold with most of the bullion stored at the central bank in downtown Caracas.

Venezuela has almost $8bn to repay in principal and interest payments this year, according to economist Alejandro Arreaza of Barclays.

Although it has so far made good on its debt payments, Moody's Analytics ranks the Venezuelan government as the second most likely to default behind Ukraine.

At almost 377 tonnes, Venezuela has the world's 16th-biggest gold reserves, according to the World Gold Council.

The late president Hugo Chavez, a longtime US critic, said he would free Venezuela from the "dictatorship of the dollar".

He directed the central bank to ditch greenbacks and start amassing gold instead. Four years ago, as a safeguard against market instability, he brought most of the gold stored overseas back to Caracas.

The deal with Venezuela is a coup for Citi, which has been growing its commodities business as rivals including Barclays, Credit Suisse and Deutsche Bank have been retrenching or retreating from the sector because of increased regulation.

Citi has been using its global lending franchise and trade finance business to pitch and win deals.

It has been involved in Mexico's oil hedging programme - the largest of its kind in commodities markets - and also entered into derivative contracts with the Moroccan government to hedge the cost of imported fuel.

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