Adjustment or collapse? The case for collapse

2013-12-19T102108Z_2_CBRE9BI0E7400_RTROPTP_3_NOMURA-EARNINGS_originalAs the debate about whether Venezuela is facing macroeconomic adjustment or macroeconomic collapse rages on, some traders* at giant Japanese investment bank Nomura make the case for collapse about as succinctly as is possible:

“Let us start with the one-liner of our trip last week: we came back more concerned about Venezuela. It is becoming clear that Sicad II will not be used as a vehicle for a fiscal and external adjustment any time soon. Senior government officials understand the need for a more coherent FX regime, but they themselves recognize that the political and social context to make it happen is not there. The timing and size of the latest PDVSA issue is just a manifestation of this – by allowing PDVSA to sell just a few weeks of exports through Sicad II, the company would have collected the same amount of resources without further deteriorating its creditworthiness.”

Here’s the context: When Sicad II came into existence, most people (myself very much included) assumed it was a fig-leaf for devaluation. Sicad II would allow a dollar seller to turn a given number of dollars into many more bolivars, and in Venezuela the overwhelmingly dominant seller of dollars is PDVSA, which then turns the resulting bolivars over to the government.

Everyone’s assumption was that Sicad II was  just a “polite” way of devaluing – i.e., allowing PDVSA to turn the same number of dollars into a greater number of bolivars. If that’s not the point, it’s sort of hard to see why they went to all the trouble.

Devaluing to the Sicad II rate would end most of the government’s fiscal problems instantaneously.

What Nomura’s traders point out is that Sicad II is not (yet) being used as a vehicle for devaluation. PDVSA is still not selling its petrodollars for Bs.50 each. So the government remains deep in the fiscal hole: spending many, many more bolivars than it takes in. Which is why PDVSA has been having to borrow the shortfall instead, by issuing fresh bonds at very high cost.

Is the decision to let PDVSA keep piling up debt rather than let it “jump” to the Sicad II rate with both feet a sign of a pre-meditated belief in gradualism? Is it evidence of a power struggle over key policy levers? Is the willingness to keep issuing very high cost debt when a low-cost alternative solution is close at hand a matter of just sheer stupidity? Or does it show someone working extra-hours protecting their arbitrage margins?

We don’t know. We do know it’s awful policy-making. It is, by any reckoning, remarkable that the government would keep flirting with hyperinflationary conditions and default this long after it’s created the institutional mechanisms for an exit.

Ultimately, though, the “collapse” narrative is not persuasive to me. Here’s why:

Venezuela’s state finances are like a weak swimmer who’s gotten way out of his depth. Everyone can see he’s flailing. His arms are tired. He’s struggling. His head bobs under the water now and again.

And yet…there’s a lifesaver right there, within easy reach, for the taking. That lifesaver is called devaluation.

The spectacle of the struggle is frankly discomfiting, because it’s so obvious to everyone what the swimmer needs to do. It’s hard to make sense of his resistance to grab onto it. Everyone can see he needs it.

To me, the very fact that the swimmer isn’t frantically reaching for that lifesaver suggests that he isn’t in quite as much trouble as horrified observers figure he must be.

To argue Venezuela is edging toward hyperinflationary/default collapse is to argue that that swimmer’s going to end up drowning, even though a lifesaver is right at hand.

It’s not impossible, of course: maybe he’ll judge his strength wrong. Maybe by the time he panics and reaches out for the lifesaver, it’ll be too late. But, ultimately, the smart money must still be on the idea that, when push comes to shove, the government is going to maxi-devalue.

Countries don’t collapse if they have a choice. Venezuela has a choice.

*Ojo: The paper comes from Nomura’s trading desk, not its research and analysis department. People misunderstand the Chinese wall involved all the time, but there’s a thicket of rules and regulations at play here and Nomura does not (and cannot) claim the material its traders produce is investment advice, in part because incentives are plainly different between traders and analysts. So there’s that.

107 thoughts on “Adjustment or collapse? The case for collapse

  1. “Countries don’t collapse if they have a choice.”

    I’m not sure this statement is entirely correct. I mean, let’s talk about people instead of countries. Some people who need a blood transfusion, for religious reasons would rather die than get one. So, yes, there might be a choice, but it might just happen that your core beliefs prevent you from taking that choice, even if not taking it means you will collapse.

    I think this may explain partially (and only partially) what’s going on in Venezuela. I think there is more than one radical leftist in the government that would rather see us become North Korea or Zimbabwe than take any measures that look even remotely capitalistic (or look so to them at least). These kind of people may be a minority within the government, but if you combine what I said above with a few others factors, such sheer incompetence, as well as the fear to do something that might enrage people even more (especially poor people), and you take into account that their final goal is to stay in power at all costs, then it may become a bit clearer why the act the way they do.


    • I was thinking along those lines.
      We know the joke about the fundamentalist who was waiting for God to save him during a flooding and he kept rejecting all help.

      Here in Europe I don’t have a hard time explaining how the regime is becoming more authoritarian. What I have really a lot of difficulty with is explaining how it can screw up things so badly.

      The capacity of the regime to fail where no one has ever failed before is something you completely underestimate and that is because you have failed to look at the dark corners of their psyche.

      Try to imagine for a moment what it is to be in Maduro’s, Cabello’s, even Giordani’s stream of consciousness, how their neo-cortical systems react under the activity they have undergone throughout these many decades.

      It’s scary stuff, I know, I know.


      • I agree with Kepler and Getashrink. I think many Chavistas in key posts are true believers (Giordani for one). They are devout comunistas trasnochados and it is too painful to admit that beliefs they hold for 50 years are bunk. Their honestly held beliefs attached to the best intentions do not make things right.

        If they had any sense of self preservation they would bring a coalition government like Mugabe (Lula said this much), let the opposition take as much as the fall as possible while they share power and exculpate themselves as far as they can get away with it.

        Yet they behave like the Batman’s Joker in the Dark Knight:

        “Well, because he thought it was good sport. Because some men aren’t looking for anything logical, like money. They can’t be bought, bullied, reasoned, or negotiated with. Some men just want to watch the world burn.”


  2. I’m not sure the binary question “Will it be collapse or readjustment?” Exhausts all possible outcomes to the situation. Surely, without collapse, the economy could circle the drain for many years to come, with incomes ratcheting downwards towards Cuba’s $20.00 cash a month, plus-free-beans standard. But is that what we mean by readjustment?

    And I am not sure the exchange rate is the only important problem with the economy, either. Given the utter destruction of Venezuela’s ability to produce anything except oil, (and diminishing production even there) is the annual intake of foreign exchange enough to purchase, abroad, everything needed by every Venezuelan? I don’t know the answer to this question at present world oil prices; a persistent shortfall in FX would mean years of shortages, but not collapse.

    The swimmer might grab at the lifesaver, but will it bear his weight?


    • If a man falls off a 10 story building and lands flat on the pavement, has he achieved stabilization ?? In a way he has , his fall is stopped !! Not that such stabilization is any comfort to him or to his broken bones !!

      I see that sicad 2 provides us with another view of this dilemma , the problem is not what the exchange rate at which dollars are transacted is , but whether the amount of dollars there are available to sell in sicad 2 are enough to meet the us dollar demand for the country to continue to function .

      Lets we forge the Venezuelan pulblic sector has accumulated debts and incurrs ongoing costs which it must pay in US$ not in bs , the use of US$ to convert into bs ( at whatever rate) is dependent on the amount of US$ available for that purpose AFTER paying the debt and ongoing costs denominated in US$ , If most of the US$ recieved by the oil industry has to be used to pay foreign debt and costs the amount of US$ left may not be enough to allow the public sector the payment of its bs costs unless you go for a hipertrophic exchange rate. Is this our current situation ??

      Put another way if we have 100US$ to pay 80US$ Forex debt and costs and convert 20US$ into bs to pay debt and costs denominated in bs and our 100US$ is reduced to 80US$ then even if our Forex payments are reduced to 70 US$ we are still short 10US$ to use to sell and get the bs we need.


  3. Could it be that there’s a shark between the swimmer and the lifesaver (fear to devaluate and loss of confident by chavistas)? Populist’s fear is to loss the love of the oppressed…..and power!


    • They are kinda scared that they can’t excuse a new devaluation like they did with the last two ones (one from 2.15 to 4.3 by the rotten wax doll, and another from 4.3 to 6.3 by the usurper who blamed the already dead wax doll), in those times, they used the stupid bullshit that “because venezuelans don’t earn wages in dollars, then they don’t need to care about its value”, a lot of chavistas latched on that excuse and never let it go, because the other choice was ADMITTING THEY’VE BEEN BETRAYED YET AGAIN BY THEIR IDOL.


    • There is no shark. There is no lifesaver, either.

      Again and again and again, in his analysis, Quico makes implicit assumptions which are only valid in somewhat functional economies. Those assumptions are generally correct and carry very good predictive power.

      But what Quico fails to see is that those assumptions are no longer applicable to Venezuela. The country has now become far too dysfunctional to respond efficiently to economic signals.

      There is no shark. There is no lifesaver. Just water. And Venezuela is going to drown.


  4. “Devaluing to the Sicad II rate would end most of the government’s fiscal problems instantaneously.”

    Isn´t that devastatingly hyperinflationary when all prices (salaries, wages, consumer prices, capital, profits, taxes) in economy are not equally adjusted to the Sicad II rate?


  5. Hey Quico, right on the money as usual ;) thanks for sharing the info. Got any links to the traders’ note?


  6. My money is in neither adjustment (succesful adjustment, that is) nor collapse, but rather on continual mediocrity.

    When push comes to shove, the government will indeed grab the life saver, breathe calmly for 5 minutes, and then throw it far away (instead of swimming ashore with it). That is, the government will devalue, and then use the new found fiscal health, to get in trouble again, with more subsidies, more foreign aid, more corruption, more entanglement, etc. So they’ll need to maxi devalue again in 2 years, but will put if off for 4 years when people will have been wondering why haven’t they devalued in those two years.


    • What I don’t understand is: If all they want is make more time to postpone making actual reforms, why not do it in January?


      • Because they don’t want to make actual reforms.

        They have to make some reforms because the economy is fucked up, but once the economy begins to look competitive as compared to Haiti, the Chaverment will use any leeway to further pursue their ideology.

        For them this is going to be a Merentes hiatus between Giordanomics and Giordanomics.


  7. Quico, I don’t get something. If the currency is devaluated, how do you avoid hyperinflation when everything we consume is US denominated? I think that asking the question is the answer itself, but I would really want to get your logic


    • What could really cause hyperinflation is uncontrolled monetary expansion, i.e., crazy new levels of money creation. What drives money-printing is the fact that the government is financing itself through “loans” (of newly created money) the BCV gives PDVSA. Devalue, and you can quickly end the creation of new money through BCV loans to PDVSA and stabilize the money supply. Devaluation might cause a ONE TIME rise in the price level, but not the permanent hike in the RATE of inflation that you get when you print more and more money.


      • The way I see it, the collapse already happened. Devaluating is simply acknowledging the collapse and the fact that its going to take more work by the people “de a pie” to replenish their fridges. moreover, there might be a one time jump in price of triple digits percentage rates and then stabilize and we don’t get to call that inflation? I understand your logic but I think we have different perspectives of the same reality


        • Well, “collapse” tends to imply a situation where things get worse and worse indefinitely. “Adjustment” is a euphemism for a step change, from a higher-consumption to a lower-consumption situation. After adjustment, you’re poorer, but you’re not *getting*dramatically*poorer*indefinitely*.

          That’s the difference. We’re in the middle of an adjustment process. It has a beginning, a middle, and an end.


          • And you said a few days ago we are about 2/3 of the way to the end? Only 1/3 to go?

            I would have hoped the ride to get a little easier if we are this close to the end. Yet, inflation in April is said to have been above 5%, so this ride is still quite rough, whatever remains of it.


            • In Angola in 95-97 we often had 10% inflation per day. I can remember 100% over two months. Of course, Venezuela is in hyperinflation since Nov 2009 when cumulative inflation over three years first exceeded 100% – the IASB’s now globally accepted definition in the 147 countries that implement IFRS.

              Venezuela is no-where near catastrophic hyperinflation as experienced in Zimbabwe. I do not think Venezuela will get to that.

              Brazil had high and hyperinflation for 30 years from 1964 to 1994. They got out of it with their Real Plan – the details of which – if I were to describe them here – would lead to this post being eliminated here. So, I won´t describe them. I know the editors here do not want to know about how Brazil beat hyperinflation. I respect their view.

              Angola and Turkey also defeated hyperinflation without Dollarization.

              The above three countries never got to Zimbabwe´s levels. The highest level in Brazil was 2000% per annum.

              In Angola, hyperinflation was 890% in 1996 and 3200% in 1997 – as I can roughly remember.

              In Zimbabwe they printed Kwanzas and used them to buy USD on the streets.

              I do not think Venezuela will go the way Zimbabwe went.


              • The problem of those numbres could be that the value comes from the average of goods and services.
                There are stuff in Venezuela that have risen above 1000% and 2000% in the last two years (Electronic devices anyone?) while others are officialy “kept under control” with useless price regulations (Uh, ALL regulated goods except gasoline) yet they cost sometimes more than 10 times their “recommended and fair price”.


              • Ralph, As I understand it, what you are saying is that hyperinflation is actually higher than the official 56% per annum or 4/5% per month. I agree with you. Prof. Steve Hanke states that Venezuela´s unofficial inflation is currently 182% per annum.


          • Quico, but there is never “indefinitely poorer” on Earth (and I guess in economy, but then I don’t know) unless you imply “until everyone dies, until Venezuelans become like the Maya civilisation but without the scientific creation”. You either drop more or less slowly, or crash. The thing is whether the political system collapses or only the economic one.

            Can you tell us of one case where there was a collapse as you mentioned? Not even the German recession prior to Hitler would qualify for that, even with the mad inflation there was.


            • Spot on. I get Quico’s point, but this is frustrating. We have lower the bar so much for these folks (i.e., PSUV, people in power) that the discussion we have is how to label the crap that the country is being subjected to


            • I thing this comment confuses the terms “indefinitely” and “forever” and they don’t mean the same thing. Indefinitely can be taken to mean that you don’t know when it could stop getting worse, but it could still get better eventually. A good theoretical example of this are elections in Venezuela; a president can be in power indefinitely as long as he wins, but there is a chance of losing to another candidate.


  8. The social costs of a devaluation would be huge. Yes it would help clear the government’s accounts but inflation would accelerate, hurting the poorest members of society, the base the PSUV and Maburro count on for support. I believe that this is the prime reason why the swimmer is not reaching for the lifesaver.


    • I’m sure that’s how they think about it. But at some point, scarcity reaches a level where “low price” stops meaning “effective access to goods” and where re-establishing goods availability, even at higher prices, becomes a political net-positive. To judge by the massive anger at scarcity in the last Datanalisis poll (where scarcity was even higher than crime in people’s list of concerns) – we’re pretty near that point.


  9. OK, what if the government does nothing? What does it mean really here “to drown”?

    Sometimes I feel the regime doesn’t care: there is enough time before the elections. Imagine this: things get worse, the opposition starts making more moves without a plan, as usual: protests without having thought about the different scenarios… the government then declares it’s all due to the opposition protests (I am talking about new protests the government will promote against itself),
    then the government takes a much heavier hand against the opposition next year.
    What can happen? The opposition will probably get due to gerrymandering the same share of deputies it got now and those deputies will be more emasculated than ever before. Do you think the CNE will allow for an oppo majority?
    Still nothing happens at least until 2016…which is a lot of time in politics and an eternity for Venezuelans.


    • Now you get what I have been trying to say for months!!!!! This is exactly what chavismos is doing and why exactly I think LaSalida was the worst thing can happened to the opposition. We just gave them an excuse to blame us on anything that is happening right now. I already saw it in Cua, they are blaming the opposition for the scarcity “the protests are not letting the goods to arrive into the stores and when they do are more expensive because it takes longer to get here”. This is from labor personnel at the construction site, the real chavismo, the guys who vote for maduro.


  10. Articles like this remind me how ignorant I am about economics. Suppose the government does get the lifesaver. What will happen then?


    • The lifesaver is basically a large tax increase. What happens is that the government balances its books by making everyone in the country poorer. The threat of *very* high inflation diminishes. Bond-holders get paid. Shelves get stocked. The economy becomes less chaotic, but not more prosperous.


      • It seems to me that for you even the Mayas’ civilisation didn’t collapse…it just settled down to a poorer equilibrium.


        • ‘Xactly, the Mayans just felt they had enough with all those modern newfangled things, temples, astronomy, organized states, etc. They were pinning to a simpler life, close to nature, more balanced, a new equilibrium :-)

          Quico, like it or not, median real incomes at the level of Nicaragua IS collapse for Venezuela.


      • Normally what happens is that it does not magically fix the economy overnight and the government has to keep on repeating making the country poorer and poorer with higher and higher hyperinflation. That stopped overnight in 1994 in Brazil when they implemented their Real Plan.


        • *Very* high inflation (hyperinflation) only stops if the Central Bank stops printing/creating money in excess of what is required in the economy.


  11. FT: So where is Nomura’s paper, as produced by its traders? You explain the argument and produce one quote from said paper, as well as several links, just not any related to the source at hand. Care to share?


  12. Excellent report by NAMUR and excellent post by Toro.
    But NAMURA traders’s report is optimistic about the oil sector, where, they say, “positive surprises might occur”. They state: “We found officials in private oil companies far more constructive than in the many years we’ve been talking to them. They mentioned that the introduction of Sicad II made a huge difference for them – their projects are now more financially viable. They still see a few hurdles ahead but apparently things are moving more expeditiously these days. Infrastructure work in Orinoco, a necessary condition for projects to take off, is finally happening”.

    However, they do not give one single example of this take off taking place. No production increases in the horizon, certainly no new upgrading plants being started , not even enough light oil to blend with the heavy oil is available.
    And, of course, official in private companies talking to traders of an important investment bank would be careful not to be apocalyptic about the situation, they might want to sound mildly optimistic. .


      • There are many oil projects which are at a stand still for lack of money or inhouse managerial competence or because of erratic prioritizing , The national penchant for ambitious but inconclusive efforts which for decades riddled public projects has now fully contaminated the oil industry, As these unfinished projects abound operational and financial problems multiply which makes finishing them more difficult..

        Still Nomura is right in that there currently is an ongoing effort in Pdvsa (such as never existed before) to try and be more rational in seeking expert and managerial help trough deals with private interests to improve or restore production, where these latter interests are paid for example with a participation in future or restored production or where big time contractors are guaranteed to be handsomely paid (on time) and given more operational and functional carry out certain key projects .Efforts are also being made to deal with the problems associated with having these private interest funnel their forex invesments into bs at a half reasonable rate ( thus the sicad initiatives)

        Presumably there are 11 billion USD in deals of this kind , However getting these deals off the ground is tough and difficult ( in part because of Pdvsa beaurocratic red tape ) and the number of deals that have gotten off the ground are minimal.

        However unlikely , if enough of these deals make it through the red tape and other operational difficulties and actually get going they may ultimately have a favourable impact on Pdvsa production and help the regime in coping with its financial straits. This possibility, however remote cannot be discarded .!!.


  13. I’m not an economist, but when I attended the UM sponsored seminar in December, the title was: “Venezuela, a country on the verge of Collapse?” the economical panel Monaldi, Ochoa, a gringo economist from Wall Street and someone eslse I can’t remember. I sent the conclusions to you guys, but… No me pararon. Basically yes, unless the gvmnt had the disposition to take the necessary measures. They predicted the protests with the students heading them, but they finally came to the same conclusion as the japanese bank. No changes= certain collapse.


      • Awwww sorry moctavio! I was rushing out the door yesterday and my very right brain was confusing the members of the political and economical panel. You guys were right on the money, the social explosion and the students… Unfortunately


    • (Not an economist but the way I see it…) those VEF that would buy PDVSA USD already exist, so there shouldn’t be a monetary expansion. SICAD 2 would act like a tax on USD purchases.

      On the other hand, every USD PDVSA sells on SICAD 2 is a USD it isn’t selling on SICAD I or CENCOEX (former cadivi), which could mean that:
      – Now-prioritized goods get scarcer, because there are fewer cheap dollars to buy them.
      – Now-prioritized goods get pricier, because they have to use a higher exchange rate which affects only those goods (not the economy as a whole like printing money does).
      – Now-prioratized goods remain about the same, because the government shifts USD subsidies to VEF subsidies (they get imported at SICAD 2, and then the government subsidizes producers/distributors in VEF).


  14. Prophets of apocalypse keep ranting, in the meantime, coupons are still being paid on the bonds, let’s clip clip and go fishing.

    I don’t understand how the majority of you still fail to see that the current economic status is merely financed with the indifference and the general lack of standards of those supporting the government or simply being agnostic to the situation. This can be done as long as a VAST majority of the population or at least the military overthrows the government. 30% of the population won’t do, nor will 40%, 50%, 60%… You need more, you need an unstoppable mass. The mass is also not there due to the fact that opposition muppets have been as incompetent as those in power, if not more (but they are still around, which is sad?)

    By the way, the reference to issuing bonds at a very expensive rate is kind of irrelevant. Yes it is expensive compared to developed countries, but for Venezuela/PDVSA it has kind of always been this expensive, so this doesn’t really change the underlying dynamics of the situation towards collapse. In fact, Venezuela/PDVSA have issued debt at much higher rates so…

    And let’s not even go to the most recent discovery of more oil reserves.

    To sum it one sentence, as long as oil price is this high and the Venezuelans keep being indifferent/ignorant and do not realise they are getting ripped off when compared to say Norwegians, then no collapse

    And no I haven’t drank any Kool-Aid.


    • Timely paying bond coupons might not be the best index of overall financial health, if one considers that the government pays them on time, yet carries years worth of debt on imports and dividends from foreign owned companies.

      More oil being found isn’t a direct warranty either, since PDVSA has been decreasing its yearly output ever since the oil strike. Moreover, some of the oil we are going to pipe out in the future is going towards the Chinese loan we already spent.

      “El gobierno decidió hacer un default selectivo en el mercado interno y no en el externo” y dio prioridad a seguir pagando las deudas en bonos soberanos y de la petrolera estatal Pdvsa, para eludir el riesgo de embargos, explicó a la AFP el economista y profesor de la Universidad Central de Venezuela (UCV), Luis Oliveros.
      “Es válido preguntarse si hay un default parcial”, dice Francisco Ibarra, economista en la consultora Econométrica.

      For me it’s like saying that John has his finances in order because he pays his mortgage and credit card on time, yet he is months behind on the utilities, the car is parked because the mechanic won’t fix it until John pays the last bill, etc. It may be that he’s hoarding some secret stash that could pay all his non-bank debt, but until he does, those debts add to the suspicion that his financial situation is getting worse.


      • Financial debts are being honoured at the cost of defaulting on a large part of the countrys non financial debts and commitments with other parties ( airlines , foreign importers , contractor and suppliers etc) and the country’s inhabitants in general . If any of the later decide to collect their debts forcibly using routine collection methods or less conventional ones , and start an stampede them financial debts may end unpaid. !! Its happened before in other places and can happen again. There is an unknown tipping point , perhaps a small chance event crossing an invisible threshold and the whole edifice comes crashing down .


      • J Navarro,

        Carrying debt on imports and dividends from foreign owned companies doesn’t matter in an economy which is entirely dependant on oil. People don’t have to competitive, companies don’t have to be efficient, etc. I am not defending the model, but as long as oil is subsidising it, the govt. can afford to run it in that fashion. Ultimately, what could change the situation is a) a structural change in oil prices which could take it to very low prices – which looks unlikely at this stage even if you consider shale oil and b) an organised society which would put so much pressure on the govt. that they would have to leave the office – don’t see this happening either, at least not in the amount necessary for it to change the situation.

        Note that this is different than what happened in Argentina for instance. They ran the economy to the ground which is something they couldn’t afford to do (and even though they are still trending sideways) and kicked all the productive sectors out. Not very clever if you are main exporter of food as you need producers, you need efficiency, you need knowledge, etc. In the case of oil, less so. Despite of what the people in the oil industry like to argue, oil extraction is a relatively simple process which also explains how the govt. has been able to more or less control the mess they have created with so little resources and prepared personnel.

        You might argument all what you want on whether they are behind on utilities, etc. or what not, all I am saying is for the risk one takes, one is being compensated properly when investing in Venezuela/PDVSA bonds. Even more if you compare it to other instruments out there, across different asset classes.

        Do you know how many times the same people have argued that the collapse is immninent only to be proven wrong year after year? And of course past years are not a certain indicator of the future but when most people have failed to understand the dynamics during the past 15 years and still keep bringing up the same arguments, they can’t be expected to be taken for serious. The arguments are always the same, these lack depth and they are made by the same people who one day are experts on food suply chain, the next day they know all about electrical plants, the next day cum laude on financial markets, etc. Please… Someone should tell them thay they have been wrong on all accounts. If one invests today in Venezuela/PDVSA securities, it takes roughly 6-7 years to double your capital. Let’s go back 5 years, 8 years, 10 years or worse 15 years. It’s hindsight, but all the arguments have always been the same and no one has acknowledge the facts. And the fact is that the govt. will always be able to get away with what is doing because the people do not stand up to it in large numbers. They do not stand up because a large majority is happy because for instance, they received $1 before and now they receive $3. Of course a Norwegian receives $100,000 but, do they care? It doesn’t seem like it.

        Sadly, this is a reflection of the poor social dynamics of our country and a consequence of years of depending solely on oil. Expertise in almost all fields has vanished and the majority of people are just arbitraging the economy one way or another.


        • Venny,

          What you fail to see is that now people are not getting $3 like in 2010 but $1.5 and chances are they will get $1 within this year. I have never thought the economic system would crumble in one go, but it is obvious the system keeps going down and Venezuela is not completely isolated. Even people in the most remote areas are starting to see that. Even they have friends or former neighbours in Colombia, for instance.

          Yes, the oil industry won’t collapse completely, but every day there is less and less money for the average Venezuelan.


          • Kepler, finally someone hits the spot. This is believe is the right angle. Now, it is difficult to quantify though and I have seen conflicting figures and information from various sources arguing both ways: that people are happy with what they are getting now and that they are not happy.

            Question is, what is their breaking point? When do they walk away? Maybe they are still happy with $1.5 despite that it is not the $3 from 2010 but higher than the $0.5 from 1995? What is their reference point? Is it 1980? 1985? 1998? 2000? Difficult to know. Plus you also need to take into account that they are now frequently agitated and “supported” by a govt. who conveys the idea that they are “them” and that the govt. “looks after” them. All the bla bla populism that we all know. But, still, I fail to understand how come most people struggle to see why Chavismo has managed to stay in power so long. AD/Copei were populist, Chavismo is 10 times more populist and has 10 times more money to hand out. So it is esentially populism on steroids and people still think how come they are supported by a large portion of the population?

            An anecdote about Colombians know that you bring them up. I know quite a few very well and what do you think a large portion of these are doing? Arbitraging remittances from Cadivi like there is no tomorrow. I know for a fact that Cadivi has made it harder from them this year but still. Most of these Colombians, from the lower classes, won’t go back to Colombia even now and despite the fact that some even came in the 70’s (thanks to CAP for his disorderly immigration policy to buy votes), as their perception is that it is still better to be poor in Venezuela than in Colombia. Think about it, almost free gasoline, subsidised food, possibility of going to the beach with 4 people on a motorcycle, stolen electricity, etc. etc. You can cut the subsidies on gas, on food, etc. all that you want but that still won’t come close to paying for things at their real price in a country running a more or less real economy.


            • There are no remittances to Colombia this year. Govt. said it would pay in pesos and never arranged with Colombia how to do it.


              • Thanks Miguel. I’m not fully up to speed on every detail on Venezuela but good to know.

                Well, it is probably not the right approach but between 1) Uncontrolled remittances on the back of people arbitraging the system and 2) No remittances at all , I’d say I’d go for 2) … But then again, this would fall into a discussion regarding whether one thinks F/X controls are good or not, which I believe aren’t but this is another topic.


        • People tend to think that keeping the oil flowing is automatic, they dont give much thought to the complex management and technical effort and financial investment involved in simply maintaining production as fields age and generally to keep production going under conditions that dont stand still but change as years pass .!! This is where Pdvsa has proved a big failure .

          People count the barrels but they dont count the costs and difficulty of getting them to market . For example light and medium crudes are generally easier and less expensive to produce and handle and easier to sell at good prices . Venezuelan is growing increasingly short of light medium crudes as existing fields age requiring them to be replaced with increased production of extra heavy crude in places where there is little or no infrastructure to help with the production effort, requiring huge invesment just on the infrastructure side , moreover these crudes cannot be sold in their original conditions , they have either to be mixed with high prized not easy to obtain lighter crudes or refined products or putt through an upgrading process to make them more marketable, . All of the above requires expertise both managerial and technical which pdvsa no longer posseses and very high money investment . the costs of course are much higher than those needed for producing and market conventional crudes which makes them much less profitable than other crudes . In short you have to run to stay in the same place and Pdvsa is no only a very slow runner but is fraught with corruption incompetence and political biases that make getting outside private help very very difficult specaily as it has a well earned reputation for not paying their business partners and contractors what they owe them ( or even expropiating them when they cant be paid) .

          Also not considered is the heavy price of corruption and mismanagement in the oil production process making Pdvsa a much less profitable company as each year passes ( anyone can guess at the amount of cosmetizing and massaging that is done with Pdvsas figures) , Literaly hundreds of million of US$ are lost to corruption or erratic mismanagement on an almost everyday basis , much of which is never reported but somehow gets out through the grapevine of its sometimes very talkative officials.

          For example sales to certain favoured customers are never paid into Pdvsa coffers but either funneled to allied govt bank accounts or simply billed and not paid , the Pdvsa figures however will show them as part of Pdvsa income. It is very naive to think that future payment of financial debt is assured whatever happens in the running of Venezuelas oil industry that affects its net available income or continuing production .

          Much more attention needs to be put on the oil production side of the equation


          • Fair enough Bill.

            Given that last time we crossed each other on this board you called me a troll, I don’t know how long should I actually take to reply or if I should at all. You might still think I am troll but that would make me a wealthier troll since we last exchanged posts as I am roughly 8% up on my last PDVSA allocation since I last posted here. And lets be frank, if I would have guided myself by your position and that of the majority posting here, I would have been worse off. And no, I am not ashamed of sharing my achievements when they are product of my own unbiased analysis, which has proved to be quite useful throughout time. And yes, PDVSA might collapse tomorrow and we all lose our capital, etc. A meteor can also crash on earth and I can get killed crossing the street, so will I stop carrying out life and taking opportunities because of it? Well that is what people have done by missing out on PDVSA/Venz investments over the past 15 years.

            But I like to keep discussions going and perhaps I am wrong, but I do think oil workers, particularly those in Venezuela, liked and still like to glorify their industry way above of how complex it actually is. Look at most oil producing countries, they are not exactly an example of highly planned and industrialised nations.

            The last bright, public and prominent person that came out of Venezuela who knew how oil actually worked was no other than Juan Pablo Perez Alfonso. Ever since, we’ve had quite a bunch of colourful muppets left and right running the company (with very few exceptions). In particular those in place now. But let’s not forget the illustrious workers of the 90’s (who also pushed for a suicidal 3 month strike, amongst other mistakes) that were pushing for a massive increase of production in mid-90’s to increase revenues on the back of low oil prices. Way to go! Clear understanding of how pricing of a scarce resource such as oil works!

            This is a discussion we will probably need to have on the phone or in person but my position is that producing oil is not rocket science.


            • Vennie : just to get a few things clear :
              1. in my books your are clearly a troll
              2. Even if your were not, Im not interested in your private business affairs. brag about them to someone else
              3. From your comments its clear you know nothing about the oil business . even less about why the prices have risen in the last decade . Not going to waste my time with any further comments to you.


              • Perhaps your book is broken. Could be, hence the poor track-record. Given that you are an “expert”
                (I’m very sceptical regarding experts across all fields btw) we should consider uploading your profile to so we can all keep track.

                Which reminds me, didn’t you estimate once that PDVSA/Venz. were only getting daily revenues for 1.6mm barrels and not 2.4mm barrels? You really think that if shit hits the fan, the Govt. won’t look to maximise revenues and seek to collect payment on those barrels going forward by cutting subsidies to petrocaribe, etc. (Which they started doing btw).. ?


    • I remember douglas farrah ( check his book) in the UM conference saying to everybody’s horror that the gvmnt doesn’t even need oil money. Not a cent! Vzla has become a rogue state in the middle of the triangle of the drug trade of the soon to be legitimized party of the FARC, Cuba and he believed Iran. I don’t know where the new Iran Gvmnt stands in this triangle. But the drug generals that aid and abet the said drug trafficking make up for the ever lower production of the very inefficient red PDVSA. Wonder why they haven’t cared to keep it up?
      Read it here:Transnational Organized Crime, Terrorism, and Criminalized States in Latin America: An Emerging Tier-One National Security Priority [Paperback]


  15. I meant to say:

    This can be done as long as a VAST majority of the population or at least the military does not overthrow the government. 30% of the population won’t do, nor will 40%, 50%, 60%


  16. A quick reading of the note is that they are mainly focusing on the internal balance implications of the problem (the enormous subsidy associated with the multiple exchange rates and its implications for PDVSA) and less on the external balance, which is the crux of the matter for the collapse story (and for external bondholders). The fact that PDVSA is continuing to issue bonds to fund these various FX markets (abstracting from the rate at which they are selling them), and that the latter markets have been fed by the sale of previously issued bonds held by public bands, are a (granted very noisy) signal that the external adjustment may be far from complete, because net foreign assets of the public sector are still declining. That would seem to go somewhat against FRod’s claim that the external accounts are improving.


  17. ” To me, the very fact that the swimmer isn’t frantically reaching for that lifesaver suggests that he isn’t in quite as much trouble as horrified observers figure he must be.”

    for me Quico, there is another line of thought open for discussion: The swimmer is not trying to save him/herself but is being forced to swim in this open waters. He will drown and that is OK for his/her managers who get something else for hi/her sacrifice.

    Venezuela is not a sovereign nation, and its interests are different from those who control her.


  18. I read this rather long thread very quickly, and maybe someone else already made this point. To the extent that Venezuela’s crisis is a financial crisis, the lifebelt metaphor seems pretty accurate. But that is just one aspect of it – and not the most important one either. A financial crisis can indeed be resolved by grasping the lifebelt and thereby injecting financial resources into the economy, given all the painful adjustment elements everyone knows about.

    But in Venezuela the supply chains are broken. The guy (or gal) producing beer might be able to get all the key inputs for the actual liquid, but not the spare parts for the brewery. Or the bottles. Or the bottle caps. Or the labels. The one producing the bottles can’t get the inputs for the glass, the label-maker lacks the ink. And if at the end of the day you end up with a day’s worth of production, who’s to say your obsolescent fleet of beer trucks can provide enough transport to get it to market?

    At the present rate of decline, by some well-informed estimates, systemic commercial collapse is only a few months away. Even if the economic powers-that-be had a sudden rush of rationality to the head and grasped the lifebelt tomorrow, how many months would it take for that to feed through into recovery?

    Pretty soon (if we’re not already there) the Venezuelan economy is going to need something akin to post-war reconstruction, not just a rational exchange-rate policy.


    • I see that as the Maduro effect. It seems that the downward spiral picked up a lot of speed under him.


    • That observation also holds true for things like public infrastructure. A degraded and fragile infrastructure is a kind of hidden debt that continues to grow, unabated.


    • This is just a worsening of a problem that has been present there for a lot of years (since Chavismo and a bit during the Chiripero times). Before that the post was rather fast from the post office to the outside world
      (two weeks at most to the USSR or Czechoslovakia or Quebec, I recall as a child)

      Now a letter is taking as much time as letters from Alexander von Humboldt from a pueblo de indios in Apure to Prussia…and bear in mind the letters were sent during a period when the British Empire was blockading the Spanish American and Spanish coasts.

      I’ll have to write a post on this. I have been following the post debacle for years. But yeah, in principle, sending a post from Venezuela to Germany is very cheap. You just don’t get it.


  19. Collapse, hopefully.

    Now that the MUD keeps messing everything up with their retarded “dialogos” , this disguised neo-dictatorship could consolidate itself as it pretends to blend in and “listen” to the concerns, with more bribes and even more corruption, appeasing the crowds as we now see.

    It has to get worse, the current economic deterioration apparently is not enough. Otherwise, say hello to Cuba # 2 for the next few decades. Hope it gets worse so the people return to the streets really, really pissed off, and in greater numbers. “Elections” in 6 years would be stolen, again and again.


  20. Devaluation is not a lifesaver for Venezuela.

    Devaluation is a lifesaver for countries equipped with a somewhat non-competitive yet fairly functional economy and can help readjust impaired trade and payment balances.

    But, if there isn’t a functional economy ready to answer the devaluation, devaluation has no tangible effect. And that’s the situation of Venezuela, a country that no longer has a productive economy to speak of, save PDVSA (and barely so).

    For a lack of local producers ready to fill the gap of now unaffordable imports, the only effect of devaluation will be to make imported basic staple and consumer goods merely unaffordable rather than unavailable. The shops will be full and many won’t be have the money to buy. It’s actually better than not having anything to buy but barely.

    At least, it will make it clear to all Venezuelans how poor they have become, readjusting perception to reality. So devaluation won’t be a complete failure in that respect. Knowing you’re neck high in of pool of shit is always the first step of dragging yourself out of the cesspit. It may also have some beneficial side-effects like putting a dent in smuggling and black-market by reducing the scope of subsidized ‘price-controlled’ goods, hence reducing the opportunities for arbitrage. But that’s that.

    Beyond that, knowing you have a problem, namely that Venezuela is now a third-world country left without a productive economy after 15 years of Chavismo, is only a first step. It will not bring any solution of its own. At best, it will make a solution possible.


    • Devaluation is not a lifesaver, but is a required step in bringing back the economy to normal, however long it takes. The first thing you have to do is balance your income with your imports. It will be so tough, that you will have to set aside some money for food subsidies. It is like what Greece did three years ago, they had to start paying for living beyond their means. Venezuelans will have to do the same, including paying for those cheap tickets they got and the cheap dollars and cars too.

      Beyond that, reconstruction will take time, brains, honesty and patience. But think about what the Petrocaribe/Cuba/gas subsidies will bring. And I don’t see why you can’t tell bondholders that you have instantly added two or three years to all maturities beyond 2015. Or the Chinese to get in line, that things are tough and you need the cash flow. Again, the country will pay, but later than they expected. Sue me if you don’t like it.

      Then you start to look at the state companies and what t do with them, get those subsidies off the books.

      By the time you are done, the free market exchange rate will likely be around Bs. 30, not so bad after all.

      And start rebuilding.


      • amen brother, the thing is that we have gone trough so many devaluations. I am hopeless at this point that they will get it right. The indicator is:

        “Senior government officials understand the need for a more coherent FX regime, but they themselves recognize that the political and social context to make it happen is not there”

        If you are in need of these reforms the political and social context will never be there.


      • I would say both you and Fifi have it right.

        First, there is no domestic production anymore, Venezuela produces oil, coffee, chocolate and rum and that’s it. That’s the result of the past 15 years or so and the coup de grace is the internal selective multi-billion Dollar default which will wipe out the remnants of the Venezuelan private sector. Maybe it was planned like that, maybe it’s just the fruit of incompetence.

        Under Chavez I felt things could continue in an endless downward spiral, but since Maduro has taken over the country has simply driven over a cliff. In the short term, economics doesn’t provide any answers. How would a devaluation help when nobody can afford the goods in the suddenly fully-stocked shops? When people have neither water nor electricity?

        In the longer term, a devaluation has to happen. It looks like it will be preceded by the internal default, wiping out the remaining productive economy, which means that absolutely everything will be imported. At the real market rate. The only way of managing that is to have a huge cushion in place for people whose survival will be threatened by the adjustment (which must be by now 60+% of Venezuelans?). Interestingly, some of the pieces are in place for that, Mercal, Bicentenario, the rationing card…?


      • “And start rebuilding.”
        With what engine?
        Given the 15-year old political framework entrenched, in Venezuela, where all efforts have gone into destruction of private enterprise and the bloating of an incompetent public sector, how is the rebuilding ever going to materialize, in an economically healthy (or healthier) environment?


      • Hear hear… If other countries do it, why can’t we? Because there is no political will to do it. And if Farrah was right with drug money coming in why even care?


  21. Franciscos arguments in favour of devaluation is that if Pdvsa were to be allowed to sell some significant portion of its oil income at the sicad 2 rate then it would be able to get enough of the bs that it needs , to allow the BCV to stop printing and lending it funny money thus helping bring inflation down .!!

    At the same time by hiking the price of imports it might help bring local production up to meet local demand which can no longer be sattisfied through too expensive imports !! But if the local productive capacity is so destroyed or so import dependent to operate that it cannot respond with increased production , then devaluation would not improve things all that much in this latter aspect.!!

    In such case devaluation would help , but it might not help the economy as much as it would a normal economy !!.


    • I don’t think Francisco has implied that devaluation is the solution, only that it is a necessary part of the solution.


        • N Smith, not necessarily. If devaluation, together with the other necessary economic corrections, were implemented and achieved a more efficient economy than that of USA, then there would be a deflation, even without indexation.


      • When a developed country devalues – I remember decades ago – all prices adjust because it is a developed country with a properly functioning economy. That is why devaluation works. No follow-through adjustment of all prices and devaluation is just more hyperinflation because the Central Bank prints the extra local currency necessitated by the devaluation in a dysfunctional economy.


        • N Smith, it’s not how developed a country is that determines if prices adjust; it’s whether the rules in the country allow the market to adjust the prices. It’s the freedom to set prices, and a context of competition, that allow a devaluation to work. In fact, it’s that very freedom of prices in a context of competition that prevents governments from printing too much, because people in those economies are well aware that any inflation must be due to the printing and not to any hokus pokus with prices and monopolistic behaviors. Governments in those cases must curb their desire to print or lose elections. If only we could tie their hands regarding entering any kind of debt…


          • I agree 100% with you. Indexation, like Brazil did for 30 years with very high inflation and hyperinflation, leads to a relatively stable real economy and positive economic (GDP) growth. Indexation is a direct method for stabilizing any economy. What you described above is indirect indexation: correct price adjustments via competition etc, etc. Indexation is a direct tool: you will stabilize the economy. I am sure you will agree that Dollarization is direct indexation of all prices too. Unfortunately it is very costly and you lose your sovereign power over monetary policy: it kills your Central Bank. Indexation is free and it stabilizes your non-monetary or real economy (see Brazil). Unfortunately it does nothing to hyperinflation as long as your Central Bank keeps printing money. However, if you are really brave and index your entire money supply too, then you will have inflation, but no effect of inflation like today in the $3 Trillion of government inflation-indexed bonds all around the globe.


            • Yes, excepting for two things:
              a) distributing money from oil achieves dollarization without losing monetary sovereignty and without leaving anyone out, and
              b) indexation is only a stabilization for those whose income is a result of an accounting system; the unemployed or in the informal sector are on their own to adjust the prices of their goods and services an even greater amount than they were already adjusting before indexation.


              • The unemployed´s unemployment benefits and then social benefits would be adjusted daily with indexation.

                The people in the informal sector are the true champions of daily indexation: they always instinctively index their prices daily before everyone else in the economy: they always are the first to implement daily indexation without knowing anything about the economic and accounting theory behind the practice: they do it instinctively in order to survive: they live real lives: they are right at the coal face in the economy: for them it is daily index or die. They daily index – they don´t die.

                Obviously this is only true when there is a dynamic market all around them – for example a parallel market in a vibrant hyperinflationary economy. The people in the informal sector in Venezuela are not dying like flies. They are the ones knowing the best arbitration schemes in Venezuela and all other schemes to survive.


            • N Smith,

              a) your counter regarding pensions and social benefits not only depends on an accounting system but also depends on the government adopting indexation, so I stand by the statement of flaw of daily indexation in the case of those whose income is not a result of an accounting system, so they are left to

              b) make their own adjustments of “an even greater amount than they were already adjusting before indexation”; your reply of their being true champions does not counter this statement.

              Instead of denying the above flaw in daily indexation, it behooves you to propose a fix for it.


      • Ex : I understand that, Also important (inter alea) is that price controls and subsidies be either elliminated or made more rational because local industry not only has to fight the unfair competition of artificially cheap import goods but also be capable of recieving an income that allows it to cover its costs and recieve a decent profit. as determined by a free competitive market. Devaluation is part of what has to be done but clearly there are lots more things which have to be considered !! . ,


        • bill bass: “…a free competitive market.”

          I’m in the choir, and that’s the first line of my chorus!


  22. Devaluation? Economic measures now? Fortunately, those stealing monkeys in power have no idea about any macro or micro economic concepts and couldn’t care less about long term economic fixes while they continue to steal.

    Fortunately yes, because we would be doomed if they economy started getting better now.We need extremely pissed off people in the streets to overthrow this disguised neo-dictatorship. That’s the only way now.

    Disastrous socio-economic news in Venezuela are good news now, sadly and paradoxically. So please don’t give those Chavista dictators and the MUD retards any clues.


  23. Most sincere statement today to those that believe in this “pragmatic” adjustment.

    President of the airline association:

    “Debt with airlines is above operating international reserves”

    There, solve that with a devaluation.

    Oh! Debt with private sector with Cadivi also is above international reserves. Oh! Debt for dividend repatration is also above operating reserves. Oh! Debt of PDVSA with partners is also above operating reserves! Oh! debt with PDVSA suppliers is also above operating reserves!

    Oh! The amount of money Venezuela has to pay in October for the 2014 bond is also above international reserves.

    Is there a pattern here?


    • moctavio, well, slightly cynically: step 1) liberating the FX, both in price and in amount of trading, the bolivar devalues to a given market value, step 2) print money to make each debt payment, thus devaluing the bolivar even further. This latter step is, in effect, a capital tax to all holders of bolivar currency and would cause a mad rush to get rid of bolivares, which leads to step 3) a third devaluation. But, given that the government has no limit to how much it can mortgage future oil and other resources, Venezuela could possibly survive such a debacle. If it does survive, then, technically, the problem would have been solved with devaluation…


    • OT:FYI on the use of Sicad 2 as a vehicle for ‘covert’ devaluation which helps Pdvsa get enough Bs to stop it asking the BCV to provide it with paper money loans which hike inflation .( Francisco dixit) .

      1. Pdvsa issues 5 billion USD bond (6% yearly coupon)
      2. Sells it to Govt Banks
      3. at price equal to 3.2 billion USD (bond market discount) multiplied by Sicad 2 Bs rate ( 50 bs per US$)
      4. Payable in bs on a deferred basis
      5. Govt banks sell bonds at Sicad 2 at Sicad 2 exchange rate.
      6. Gives proceeds from sale to Pdvsa in payment of Bonds ( less fee ) .
      7. End result : Pdvsa gets to acquire Bs at a approx 36bs per USD exchange rate in exchange for having to pay 5 billion USD plus 6% cuopon in several years .
      An exchange rate which is almost 6 times more favourable than the exchange rate it would get from selling USD to BCV..

      Just in case you havent yet figured it out.


      • Pdvsa has an accumulated BCV debt in bs equivalent to USD 75 billion (using a 6.30 exchange rate) , assuming that Pdvsa had been able to use the above sicad mechanism to obtain bs at at 36 bs exchange rate , how much would it currently owe BCV ?? is the sicad 2 covert devaluation a fix that can really wipe out Pdvsa need for BCV funny money loans ?? Just wondering .


  24. Alberto Ravell ‏@AlbertoRavell
    Gobierno hara road show en Londres y NY para colocar bonos.

    So, who won the bid to underwrite?
    It’ll reveal the reason for the softy-softy analysis.

    (Etiam pretium. Or, follow the money.)


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