Whenever people mention the possibility of default for Venezuela, they talk about the dire consequences of such a possibility. Among other concerns, people always mention that trade finance shuts down, access to new borrowing in the international credit markets simply ceases to exist, assets abroad can be attached, there are long lasting effects on economic growth and default usually is followed by a period of political instability, including coups, if the population believes that defaulting will be a negative for them.
But how much of this is true and how much of it would apply to Venezuela if it defaulted? I have been looking at this question for a while and I will give you my conclusion right off the bat and later tell you why: Default does not appear to have in most cases the dire effects predicted, it does not appear to be the four letter word that most think it is. Not only are the effects of defaults varied, but in the case of Venezuela, after so many years of exchange controls the impact on trade may be much more limited. Unfortunately, the positive effects on exports that defaults have should largely be absent in the Venezuelan case.
Let’s look at each of these:
Assets Abroad
Let’s start with the most important factor that Venezuela would face if it defaulted: assets abroad. With PDVSA owning Citgo, refineries and tankers , it would be too risky for PDVSA (or even Venezuela) to default and not have investors go after Citgo’s assets in the US. Judges would be very sympathetic to the attachment of these assets which likely represent near half the recovery value of PDVSA bonds. This is perhaps the biggest obstacle to Venezuelan authorities even considering even the possibility of a default. It is also the reason why investors have been concerned over the possible sale of Citgo or parts of Citgo, as it likely eliminates the most significant factor why Venezuela would not consider a default. Thus, it is my view that PDVSA will not even think of a default until, when and if, these assets are sold, a process which could take at least a year to be completed. And it is likely that Venezuela would not consider it either, as Venezuela, being the sole owner of PDVSA, would also risk the attachment of PDVSA’s assets, or at least, extended legal action abroad over them. It would not be difficult to show that there is little difference these days between PDVSA and Venezuela.
No access to international markets
The second most important reason why Venezuela or PDVSA would not want to default, is because it would lose access to international markets. It could go the way of Argentina, and issue “local” law bonds, but this has proven to be very expensive. Venezuela already has to pay high interest rates, imagine what it would be like if it defaulted. So far, Venezuela has avoided paying huge coupons, using the perverse mechanism of issuing bonds in exchange for Bolivars at the official rate of exchange with a low coupon, which would trade at a low price in US$. Perverse, because in the end future generations have to pay the capital, while the bonds are issued to support an absurd foreign exchange system. Venezuela issues dollar denominated bonds to be sold at an artificial rate of exchange, but the country or PDVSA get no dollars for the issuance, but rather create a liability down the line in foreign currency.
But while everyone thinks of Argentina in 2001, when gauging the impact on access to international markets, people seem to forget that most countries have become serial “defaulters” and returned to markets. Russia defaulted in August 1998, but between Aug. 1999 and Feb 2000 it had restructured all its debt and has been back borrowing in international markets since then. The Ukraine defaulted in 1998, then again in 2000, with most bondholders accepting terms. The Dominican Republic defaulted in 2005, but restructured bonds with the same terms, but a five year extension, which bondholders welcomed.
The problem is that not all defaults are created equal. Some countries have liquidity problems, others know they can’t keep paying long term and finally, some countries simply decide they “can’t” pay. The last one, is political decision and it is a matter of whether they can or not survive with it. Some argue, that there is such a thing as an excusable default, whereby both the creditors and debtors need to renegotiate because it is the optimum solution for both. In Argentina’s case, that country managed to restructure its debts almost forcefully, appearing to gain a victory, but years later, it is still fighting that result.
But in the case of Venezuela, the biggest reason for not defaulting may be that its biggest creditor is China. And that country, or its banks, have expressed in no uncertain terms, that Venezuela should not default, can not default. China is willing to be flexible, but it repudiates default. In some sense, the decree on Oct. 10 th. changing the terms of the agreements with China, whereby Venezuela sends oil to China to pay for loans, represents the acceptance by that country that Venezuela is having problems paying the loans with oils. It wants to help, but it prefers to change the terms that even give the impression that Venezuela has defaulted with China in the sense of Hausmann and Santos. Politically, this may be the strongest reason for Venezuela not to default, but faced with a liquidity crisis, what would the Maduro Government do? Or any other one, for that matter?
Default creates immense barriers for trade
This is one of the dire consequences that is most noted when talking about the possibility of default, be it Venezuela or any other country. Except that things in Venezuela are unlike any other country in the world. In the “old” days, to import, you needed letters of credit issued or backed by local banks. But when you have spent ten years under a fairly strict currency control regime system, when banks are limited to 15% of their equity in foreign currency, the same banks stop issuing letters of credit that could one day ruin them. Thus, with Cadivi, the letter of credit system was replaced by cash at the bank, to pay Cadivi (today Cencoex) approvals, while your suppliers assigned you a credit line: They are willing to ship to you an x amount of money in goods, but if the Central Bank does not pay any “Autorización de Liquidación de Divisas” (ALD) corresponding to that amount, shipment will be suspended temporarily, until some ALD is paid to reduce the amount owed. Lest you think that this is not a cumbersome process, here is a diagram of the whole thing from a well known local bank (remember step VI can take place and VII may never happen, but the goods have been sold):
This process could be slowed down in an event of default, but it is already so long and complicated, that it will be business as usual. In fact, some of the more sympathetic countries in the region will jump with joy, if they can intermediate or supply products that used to come from Europe or the US to Venezuela if the money can not flow through regular channels when the BCV pays imports. Recall additionally that the Government has become one of the main importers in the county too.
Venezuelan oil shipments should be considered separately. Absent the assets abroad, which will take time to get rid of, the only risk will become the shipping of oil in Venezuelan tankers, a fleet worth some US$ 1 billion. PDVSA could always export FOB to countries where there was a legal risk of being attached or impounded. The oil would then belong to the other party and thus immune to being impounded.
Logistics would, of course, become very difficult and many suggest the Government or PDVSA do not have the people to do this. But I have heard that argument before and the revolution is still going on 16 years afterwards. At each step, whether it was exchange controls, firing 20,000 PDVSA workers, not paying imports, or dividends or taking charge of businesses, people predicted the end of the Chavista revolutionary world. And here we are. There may be interruptions in oil exports, but a way will be found and maybe, another revolutionary enterprise or magnate would have been born. Chavistas are experts at that.
Economic Growth and trade after default
This is the area where economists seem to disagree the most. While it is true that the years following a default are bad for trade and GDP growth, it is also true that in many cases, the years prior to the default were just as bad. Argentina had unemployment grow sharply before default and exports never wavered. GDP did contract, but never by the 8% predicted by economists and there was a boom from 2003 on, whereby GDP grew by almost 9% for at least four years.
But Venezuela is no Argentina. There would be little advantage to exporting given that Venezuela only exports oil. But at the same time, GDP is not precisely booming in Venezuela right now. The only true advantage to a default would be that the Government would be able to spend more, without control and for electoral purposes, the same movie that got the country to where it is today. Thus, Venezuela’s exports and the economy are unlikely to benefit much from a default, the opposite from what would occur in most countries.
Conclusions
In the end, if a restructuring or default were handled properly, it would not have the dire consequences most people think it would have. The country would function, exports would flow, imports would also continue flowing. But there would be little economic gain, given that Venezuela has little to export other than human resources and those are being exported en mass as we speak. But maybe it is too much to assume to believe that this Government can handle a default gracefully or intelligently. In the end, a default favors Chavismo in terms of politics, but as long as Citgo is owned by PDVSA and the Chinese have any influence, it sounds unlikely that the Government will dare to take such a difficult step. Watch out for both!
The Devil's Excrement 
November 3, 2014 at 8:59 am
Mr. Lin look here, http://en.wikipedia.org/wiki/Juan_Pablo_P%C3%A9rez_Alfonso
Mr. Alfonso considered oil to be a potential curse, see also Dutch Disease.
November 3, 2014 at 12:52 pm
of course I know what the meaning of the name of website. I just want to say it is so funny about the name of “devil sex crement”
November 3, 2014 at 12:56 pm
What can you do? Actually I have heard of people not being ables to access it because it contains those three letters.
November 3, 2014 at 9:03 pm
people from where? at least I know i am in US and i can access to this website.
November 3, 2014 at 9:32 pm
I have been told by readers that certain firewalls dont allow websites with the word sex in the title.
November 3, 2014 at 10:31 pm
they could close the fire wall and try again
November 3, 2014 at 1:27 pm
Ah I see. :
November 3, 2014 at 11:29 pm
anyway, very impressive name.
November 1, 2014 at 2:10 pm
Do you realize that the address of your website is http://devilsexcrement.com/. which is devil sex crement.com
October 28, 2014 at 8:12 pm
I’ve read in more than one place over the past few days that VZ subsidies for local gasoline cost the country $16B a year.
Is that possible? How can it be that much?
October 29, 2014 at 12:42 am
It can be more, depending on how you calculate it. Here are some links. I came up with $30 billion= 750,000 BBL/day domestic gasoline consumptionX42 gallon/BBLX $3 per gallon US at the pump X365 day /year. Others do it on basis of cost of production, which IIRC comes up to $5 billion per year. Lot of wiggle room in these calculations.
http://devilsexcrement.com/2011/05/27/the-perverse-gasoline-subsidy-in-petrostates/
http://devilsexcrement.com/2011/01/05/how-cheap-is-gasoline-in-venezuela-another-reality-check/
http://caracaschronicles.com/2011/01/05/leadership-on-the-gas-subsidy/
October 29, 2014 at 5:46 am
Okay–that explains it. But let’s face it:
It’s a social and economic impossibility to use U.S. prices to compute the total. You can’t feasibly consider prices close to U.S. prices now…and you couldn’t do it pre-Chavizmo either.
The country would implode overnight.
October 30, 2014 at 8:04 am
I just fully read all of the links–and it was a real time trip! It’s all from 2011, when prices were at their peak, and the stupid one in the red beret still walked the earth.
The most satisfying part was realizing that the stupid one in the red beret DOESN’T still walk the earth!
October 30, 2014 at 9:17 am
You can’t feasibly consider prices close to U.S. prices now…and you couldn’t do it pre-Chavizmo either.
While you are correct- for that matter there would be a firestorm in Venezuela with gasoline at US$1/gallon- the irony here is that US gasoline prices are much lower than in Europe. Around $7 US/gallon in Europe. 🙂
October 30, 2014 at 9:42 pm
Why have they always been so high in Europe? Taxes?
November 1, 2014 at 8:13 am
Taxes indeed.
I am happy about it.
October 28, 2014 at 11:38 am
Hello, I am a Chinese. I want to say I love your blog and I am very interested in Venezuela economy. recently I tried to figure out how Venezuela issues its bonds. it seems that Venezuela has a very wired bond issuing system.it issues dollar denominated bond in exchange of bolivars in official rate and we all know this so called official rate does not represent the true purchasing power of Bolivar. it seems owe US dollars in exchange of a bunch of waste paper. I want to know why Venezuela use this way to issues its bonds, it seems suicide for me.
October 25, 2014 at 8:48 pm
Here’s the money quote: “But I have heard that argument before and the revolution is still going on 16 years afterwards. At each step, whether it was exchange controls, firing 20,000 PDVSA workers, not paying imports, or dividends or taking charge of businesses, people predicted the end of the Chavista revolutionary world. And here we are.”
Venezuela, default or no default, still has a long way to go until it hits rock bottom. For God’s sake, Cuba isn’t even there yet. Part of the genius of communism/totalitarianism is the demoralisation of the population. Export the thinking (and non-thinking) troublemakers and all you’re left with are sheep.
October 27, 2014 at 4:46 pm
I don’t know about that:
I think it can be convincingly argued that Cuba hit rock bottom two decades ago, and even earlier–because you have to omit the Soviet aid from the equation.
Are people starving to death in the streets? No–but if that’s the measure of rock bottom, it can never happen because of foreign aid.
October 28, 2014 at 12:29 am
Good point about defining “rock bottom”, Ira. Here’s my definition: Rock bottom is when you would rather fight and die for your liberty rather than continue to live with someone else’s boot on your neck. Cuba might never reach there in our lifetimes, but history shows that, sooner or later, when a people have had enough, they rebel. And win their freedom.
It’s not so much about foreign aid as it is about wanting to be free. (And a basic part of freedom is being responsible for yourself.) Venezuela is far away from this point. America is moving in the wrong direction.
October 25, 2014 at 4:43 pm
I still think they’re going to default.
October 25, 2014 at 4:54 am
Miguel,
That piece of economic history is interesting
” I was close to the nascent local electronics maunfacturing industry in 1980-1983, the Luis Herrera devaluation destroyed them, never came back.”
Can you explain further?
On one side I know a devaluation can make a country more competitive, but at the same time it is trickier if you import a big part of your components.
So: were these guys really such producers or more of assemblers with a little bit of local production?
Back in 1993 or 94 I bought a Venezuelan EQUIPO DE SONIDO. It was rather like the first Chinese products, nothing refined, but it was made in Venezuela and I actually bought it out of desire to support Venezuela. Back then I could easily buy very good clothes made in Venezuela, even if with stuff imported. All of that is gone now.
And a relative of mine was working at RUALCA. They were exporting about 97% of their stuff in 1998 and they had started to expand from just simple aluminium wheels for cars to more elaborate products. Of course, they disappeared thanks to Chávez.
So: the eighties were not the end of the story and perhaps Luis Herrera Campins was not the whole reason why these electronic companies went bust.
Or?
October 25, 2014 at 7:21 am
My memory of those days – 87 to mid 90s – was that anything “Hecho en Venezuela” was for the most part junk.
There were exceptions – Venceramica comes to mind.
Fortunately here in Margarita there was always the option of imported stuff. It was more expensive but at least it lasted more than a week.
October 25, 2014 at 12:50 pm
Sure, most was junk. Remember: it has always been the case in any developing country. And I bought my “equipo de sonido” knowing that.
Actually: my shirts were not bad at all and I remember lots of people in Germany told me they like them.
A lot of people had the “pijo” mentality. Although food is another thing altogether, I remember going to a posh wedding where almost everything came from Italy. I told the brother of the bride (friend of mine) the food was good but that the thing was really outstanding were the grapes. He laughed and said that was the only thing there from Venezuela.
October 25, 2014 at 10:16 pm
Speaking of petrostate-made shirts, I once bought a shirt for $6 from a discount supermarket that had a label which attested that it was “Made in the Kingdom of Saudi Arabia.” Not a bad looking shirt and well made- no button replacements in the 10+ years I have had it.
I suspect that the shirt manufacturing was not continued, as I have never seen any more Saudi-made shirts.
October 25, 2014 at 8:03 am
These were young guys, developing hardware and software for making pc’s telephone switchboards, regulators and the like. They had debts in dollars of stuff they had imported, Luis Herrera devalued, the debt was paidat three times the original amount, demand collapsed. Most went under. They all high degrees from abroad and most left. Only a regulator company survived.
October 27, 2014 at 4:42 pm
When I started going to VZ in 1988, the shoes were outstanding, and very reasonable. (For my U.S. $ anyway.) I would pay 20 to 25 U.S. for comparable quality in the states going for 100 plus.
I know this means nothing, but damn, I miss those great shoes.
October 28, 2014 at 3:55 pm
I tell you: the shirts were good as well and I remember several Europeans whol told me about them: the texture, the colours…just classy and yet different.
Last time I went to Venezuela I asked a vendor in a huge shop for Venezuelan shirts and she looked at me as if I were an alien…and of course, there were no Venezuelan shirts.
Once the brother of a European girlfriend took a shirt I had left at her place and wore it. The family were really rich and extremely posh and the guy thought my shirt was just stylish and didn’t want to return it. The funny thing: lots of Venezuelans back then would have said they’d rather have an European shirt because those “made in Venezuela” were just Venezuelan. I thought back then the guy would not have believed that that shirt would
not have been worn by someone of “his position” in Venezuela.
I still believe back in the nineties there were signs we could have started to develop…and everything went wrong and my compatriots did everything wrong.
October 23, 2014 at 9:11 pm
Reading the paper “ARGENTINA’S DEFAULT AND THE LACK OF DIRE
CONSEQUENCES ” I find it outdated. The most recent data is of year 2007 when Argentina was still riding on the 2000s commodities boom.
By the way, It would be interesting to know now what the authors think about the consequences derived from the NY Judge Thomas Griesa ruling on the subject of the Argentina’s debt restructuring.
October 24, 2014 at 12:12 am
Good point about outdated data. When I saw your point about 2007 being the most recent data, I am reminded about looking at World Bank Development Database information on Argentina. When I last looked at World Bank data, 2006 is the last year for which the World Bank had figures for Argentina regarding per capita income in constant dollars w Purchasing Power Parity.
If you have reliable economic data, you should be able to calculate per capita income in constant dollars w Purchasing Power Parity. Why no data after 2006? This is about the time that the Argentine government started to prosecute economists for publishing inflation figures which disagreed with the government’s inflation figures. Conclusion: the Argentine government was fudging inflation figures. If you do not have reliable inflation figures, you cannot trust your per capita income in constant dollars w Purchasing Power Parity.
2007 is about the time the Argentine economy started to go off [once again] the rails.
October 23, 2014 at 10:20 am
Thats my first reference above. There were some consequences, but not dire.
October 23, 2014 at 10:17 am
Argentina suffered little or no negative consequences for its default. IIRC, either Caracas Chronicles or the Devil referenced this paper. Though I suspect that there would be more negative consequences to defaulting to the Chines compared to defaulting to Europe/US, as the Chinese tend to drive harder bargains.
http://econpapers.repec.org/paper/ctydpaper/10_2f09.htm
Argentina’s Default and the Lack of Dire Consequences
October 23, 2014 at 6:41 pm
I disagree. First of all, Argentina, by forcing a 75% haircut on its debts effectively reneged on them (prior restructurings in Latam and Russia had 30 to 50% haircuts). This killed investments, which when combined with price controls, gutted the local industries and turned the country from an energy exporter to an importer.
The thing is that Argentina was very rich to begin with and self sufficient in basic products such as food. The result was a long decline made possible by this high degree of self sufficiency, accumulated wealth, and by picking the pockets of anybody with money (retires’ pension funds, banks, foreign owned utilities, large agricultural concerns, etc.).
The problem for Venezuela is that the government has already stolen/expropriated productive assets and ran them to the ground. It has therefore no margin of maneuver and would be likely to insist on a huge debt haircut.
Unless a debt default would be used by some faction to radically change economic policies, I think that pain will only increase. I would argue that Venezuela doesn’t so much need more money or space to pay its debts as new policies to create more economic growth.
October 24, 2014 at 12:00 am
As I see it, it was the price controls on energy which made Argentina into an energy importer. No international money, default or not, is going to flow into a country to invest in energy where the government has frozen energy prices. Nor will domestic money flow to invest into a sector with frozen prices. In any event, my guess would be that Argentina had sufficient internal funds or agri-export dollars to fund O&G exploration.
In the middle of the recession 10 + years ago, it might have made sense to temporarily freeze energy [natural gas, IIRC] prices. It was downright counterproductive to maintain the freeze once the economy was moving again- and it got moving again rather quickly. As Venezuelans well know, populism doesn’t necessarily make good economic policy.
And then to expropriate oil companies who aren’t drilling because of frozen prices. Evita III sounds downright Chavista.
You keep Peronistas in power long enough, they will mess it up.
October 28, 2014 at 11:59 am
As a Chinese, I have to say, it is not a big deal of defaulting to China. Unlike western investors who invested money in bonds for profit, Chinese government does not care about 50 billion dollars at all. it has too much foreign currency in central bank and does not give a damn care about 50 billion. the reason why Chinese government lend money to South America countries is because it want to make some friends who hates USA. so if Venezuela needs more dollars to run its system, Chinese government may say:yes.
October 29, 2014 at 9:39 am
Exactly what I intuited
October 23, 2014 at 10:06 am
[…] At the blogs: Venezuela: Is Default Truly A Four Letter Word? […]
October 23, 2014 at 4:24 am
MOctavio escribio magistraslmente “Dummy for defaulters”, letra por letra un decalogo sobre las consecuencias, aunque nionguna sobre las probable causas, en caso que las hubiere.
Una decision de no pagar es totalmente politica, y ese fue calculo el que hizo que los peronistas en Argentina cantaran el default (Presidente interino Rodriguez Saa se arropo con el Congreso, hasta los radicales votaron por el default) para tomar el poder de nuevo y arreglarselas para seguir gobernando. Lo mismo hizo la nueva guardia ex comunista rusa. De alli salio Putin, y todavia por alli anda.
Que pasara en Venezuela si el gobierno tiene poco y sabe que si paga se queda limpio ? Cuales son sus claculos politicos para un eventual default ? Si Chavez viviera, no me cabe duda que un antecedente como los nombrados tendria fuerza. Que haria Maduro un gobernante postizo y ejecutor de una agenda que no le pertenece ? Dificil de evaluarlos, al menos desde mi perspectiva de economista.
AG
October 23, 2014 at 9:01 am
As it has been discussed in this blog (older posts). If the choice is between Wall Street and Cuba… the choice is clear… Cuba.
The crew running Venezuela, just wants to stay in power… they will do whatever is necessary to continue with their objective… They will renegotiate and avoid disruptions. As a disruption might wake up Venezuela and put them at risk.
October 23, 2014 at 3:50 am
Miguel, interesting points and nice to have all in one place.
However, I think it is also relevant to highlight why is it exactly that people think default will solve anything in Venezuela? Defaulting will not solve anything (except freeing some cash here and there) because the problem is NOT external debt.
Inv. bank anal-lists have published figures that estimate payments of ~$10bn. (both principal + interests) for both Venny/PDVSA over the next four years or so. Now, we can argue whether getting into that debt was bad or good for Venezuelans, whether the proceeds vanished, etc. We all know that it was probably not necessary etc. and that the money was not allocted properly. But why is no one focussing in the elephant in the room? A country which has experienced combined oil revenues of ~$1tn.+ over the past 10-12 years and we are getting into an argument with regard to $50-100bn. of debt? I mean, does someone not see an issue with these numbers? The country was looted and now the only people that the opposition and anti-govt. crowd want to blame is bondholders? It’s ridiculous! The problem is the overall allocation of resources that are owned and distributed by the govt – the problem hasn’t changed in the last 30 years, it has only worsened, in part because looting practices have become worse and in part because revenues have increased (so amounts looted have naturally become larger).
In my opinion, there seems to be clear political motivation from opposition parties to now shift the blame towards external debt/bondholders as part of some kind of plan (a poorly executed plan that is, as usual for oppoincompetents) to bring down the popularity of the govt. The only reasons why they can do this is because they can pin down the actual debt figures which are public – but why does no one mention where the other ~$900bn.+ went? We all know it, imports, fake imports, offshore accounts, etc. I bet everyone in this blog knows 1 or more people currently profiting or which has profited in the past from such practices (and not necessarily pro-govt. supporters). If only oppoimcompetents could focus on phrasing things properly and delivering the message the way it should be delivered without all the political wishy washy arguments.
And, to add to your comparison with Argentina, Venezuela is in a very different position. It is difficult to compare an theoretical default in Venezuela with defaults that ocurred in other countries because the economies are very different. As I mentioned before, Venezuela owns the oil and the export proceeds. On the other hand, a county like Argentina, for example, as well as any other non-oil owning country, has to produce a local currency fiscal surplus to buy the balance of trade surplus if there is one. As governments produce local currency deficits, they can only buy the BOT surplus printing money which is inflationary. On the contrary, Venezuela’s problem is deciding how to allocate the money and how to spend resources – THIS is the problem, it has always been and it will always be unless we have the institutions and the education to manage the wealth.
October 23, 2014 at 8:16 am
I really dont see the “opposition” thinking too much about default, or blaming bondholders. The discussion is more among a crowd of non-Chavista economists that are looking at this problem. In the end, they all know that is the mis-management of the economy that has brought the issue to the forefont, it is clear to all of them that remove Petrocaribe, Cuba and adjust and there is plenty of money to pay the debt. On the other hand, given how the minds of Venezuelans (on both sides) have been twisted over the last few decades, default and screwing the bondholders (Of which I am currently one) would be immensely popular.
Oil is the Devil’s Excrement indeed, but now, I feel that Venezuela is like in the old Grateful Dead song Casey Jones, Maduro is Casey Jones, driving that train high on you know what. Watch out speed!… come around the bend, you know its the end…
October 23, 2014 at 8:40 am
🙂 Love your reference to Grateful Dead.
Perhaps I am being to extreme when asigning “opposition” label. However, someone like Miguel Angel Santos, in my opinion, falls withi the opposition category. He was Capriles’s economic advisor for purposes of his govt. plan during the last campaign wasn’t he? Seems pretty “opposition” to me.
October 23, 2014 at 9:02 am
I know, but Miguel Angel is now in Boston, thinking about the country’s problems. My take on their paper was that they wanted to to note both the moral problem and the fact that there was a local default. I dont think they were trying to blame bondholders. I may be wrong.
October 23, 2014 at 10:30 am
Fair enough – Let me back track and rephrase: not blaming bondholders but discussing defaulting on bondholder as if it was actually a very relevant topic and an avenue worth exploring. In my opinion it is not that much of a relevant topic when considering the big picture (i.e. the elephant in the room), thus it shouldn’t be discussed with the frequency it is currently being discussed and if this is going to be discussed, then it should be done seriously. Now, let’s look at Miguel Angel’s latest opinion about the “elephant in the room”:
“Tienen razón quienes dicen que hay mucha sobre-facturación de importaciones que, de reconocerse todas las ALDs a la tasa oficial, premiaría a los estafadores por igual. El problema está en que ya es tarde para separar esa paja del trigo, y no pagarle a todos por igual está teniendo consecuencias devastadoras para la economía del país, que no me queda claro sean superiores o inferiores al otro default, al más formal.
Aún en ese caso, vale la pena repensar si simplemente ignoramos las ALDs y les decimos a esos importadores “se acabó, compren sus dólares a cincuenta (o a cien)”. Algo así, acaso más por necesidad que por convicción, se hizo en la segunda administración de Carlos Andrés Pérez. Como consecuencia, se le causó un daño al capital de trabajo del sector empresarial que acentuó la recesión económica en 1989 y la llevó más allá de los 10% del PIB. Esta lección, de la que poco se habla cuando se hace referencia a la experiencia fallida de reforma en Venezuela, debe tenerse en cuenta cuando se evalúa no sólo la pertinencia, sino también la conveniencia, de priorizar al sector financiero sobre el sector comercial ahora que nos hemos quedado sin dinero para cumplirles a todos.”
So, essentially, it is already “too late” and there is no point, Muy tarde para separar la paja del trigo…
And we are now talking about harming the commercial sector? Really? Venny is an oil-producing country, in a crisis situation, Miguel Angel is contemplating whether it makes sense to scale back imports? Stunning. The ONLY thing that should be done, is precisely that (and the follow with other measure like cutting back gas subsidies, petrocaribe, etc.)
By the way, I never really understood the love of many people towards Venezuelan importers – Many of which never actually had a decent operation, employed people, paid taxes or added a lot of value to society, but just pushed products here and there and collected their fee and of course, leaving most of the profits off-shore. Now, it is also true that this govt. (nor the past govt.) did a lot to foster local production or business etc. but putting “the commercial sector” in an ivory tower as often done is also not correct. There is a disproportionate amount of “importers” in Venezuela and this is hardly debated. Just go back 2-4 years back and think about all the non-sense imported products that one could find everywhere (even n street kiosks!). It is now time to pay for all these non-sense spending, but now we went towards the other extreme, less products and scarcity. Didn’t see anyone complaining about importing all sorts of ridiculous products in the past, why complain now?
October 23, 2014 at 10:43 am
Unfortunately, it has always been better to be an importer than a manufacturer in Venezuela. Could tell you my father’s story on that. I think that is why there is the “quick buck” mentality in Venezuela. many people set up a business to make money in the short term, but the goal is not to have long term cash flow stability and growth. This model has worked well, huge fortunes have been made on it. In large part is the Government’s fault. I was close to the nascent local electronics maunfacturing industry in 1980-1983, the Luis Herrera devaluation destroyed them, never came back.
I agree that cutting imports is the only solution, paying back for the easy and cheap imports of the past. Collapse demand, but they can also do many otehr things like cut Cuba and Petrocaribe and the dollar would float at a lower rate than it will otherwise. It is a really screwed up system. I would kill the Bolivar fuerte, dollarize, at least that way there are no scams and politicians hands would be tied. Things would be more rational. I think it makes sense for oil countries, but I am no economist..
October 23, 2014 at 12:24 am
One upside a default could have is that the government would be unable to keep the oil subsidy and an absurd exchange system in place for long. It would result in an extreme amount of pain for the most vulnerable in society, but this is only a matter of time anyway.