Venezuelan banking scandal widens

Caracas, Venezuela — A senior minister and close confidant of Venezuelan President Hugo Chavez resigned Sunday in a growing banking scandal that has triggered a purge of businessmen with ties to the government.

In a move likely to win him support, Mr. Chavez said he had accepted the resignation of Science and Technology Minister Jesse Chacon, whose brother was arrested Saturday following the closure of the bank he headed.

“I'm really sorry he's the brother of a minister, but we are demonstrating that there are no untouchables here,” Mr. Chavez said on a talk show he dedicated to the risks of corruption.

Venezuela last week closed the seven small banks for regulatory breaches including capitalization problems and unexplained funds. Investors dumped Venezuela bonds and its bolivar currency as Mr. Chavez threatened to nationalize the financial system.

Markets recovered Friday after Mr. Chavez stepped back from nationalization threats and made overtures to the owners of the oil exporting nation's top private banks.

Mr. Chavez Sunday accused his critics of trying to spark a bank run. He said he had no plans to nationalize big, healthy banks, but would not hesitate to do so if they broke the law or entered into problems.

“What I have said is that he who slips up, loses. Banker, I don't care if you are the biggest ... any bank that does something like that and steps outside the law will be immediately taken over.”

A retired military officer like the president, Mr. Chacon took part in a 1992 coup that sought to bring Mr. Chavez to power and both men were jailed for their actions. He has held numerous posts under Mr. Chavez. His brother Arne Chacon was also a soldier who took part in the coup, but Mr. Chavez said he barely knew him.

Eight bankers are now in custody. Pedro Torres, a banker from the same group, fled to Miami, Mr. Chavez said.

He said the government had seized businesses belonging to Mr. Torres and Arne Chacon, including insurance and food firms.

Those detained include a businessman who made more than $1-billion (U.S.) partly by selling corn to government markets.

Most analysts agree that Mr. Chavez is unlikely to risk instability through a widespread nationalization of the country's best-capitalized and profitable banks.

The rise of a new mega-rich elite during his decade in office has been a liability for Mr. Chavez, who wants to build a socialist society in Venezuela and took office in 1999 promising to end corruption.

The arrest of executives widely considered to be corrupt is likely to be popular with Mr. Chavez's supporters before legislative elections in September.

More detentions are expected because authorities have issued 27 warrants including nine requests to Interpol for international arrests.

Mr. Chavez told supporters to smoke out corrupt members of his socialist party.

“At the first sign you have to do something, you can't wait until he has 20 trucks, four planes. No, this party has to tighten the moral belt,” he said on the TV show. The audience included Public Works Minister Diosdado Cabello, who critics say has become illicitly wealthy. He denies the charges.

In 1994, a major crisis wiped out half the country's banks, people's savings and cost the government $11-billion.

“The decision of the executive to ask for help from private banks demonstrated that the government is making an effort to avoid systemic contagion. There is no reason for that to happen,” Juan Carlos Escotet, head of Venezuela's largest bank Banesco, told the El Nacional newspaper.

He said Venezuela's private banks could exist side by side with those owned by the government. Venezuela's banking system is tightly regulated, and is obliged to make low interest loans to farming, small businesses and tourism.

This year the government paid $1-billion to buy one of the country's top banks, Banco de Venezuela from Spain's Santander . Some of the recently closed banks will join the public sector and further closures could be on the cards if authorities uncover problems.

However, most analysts agree the system as a whole is solid and will remain so unless the situation is badly handled, triggering a serious bank run.