Of grandmothers and bicycles

grandma-on-bike1There’s a good reason why seasoned politicians are careful never to answer questions about hypotheticals. Trying to take positions about what you would do if something that isn’t currently the case were the case is a good way to get yourself into all kinds of trouble.

Politicians know hypotheticals sow misunderstanding, give opponents openings for attack, and generally leave you exposed for no good reason. Heck, every kid in a Venezuelan playground knows to sidestep this trap with the old saying about grandmothers and bicycles. (“If my grandmother had wheels, she’d be a bicycle”)

Ricardo Hausmann and Miguel Angel Santos fell into that trap yesterday, writing loosely towards the end of their piece yesterday about what the IMF would say to Venezuela in the hypothetical that a minimally competent macro- team materialized and turned up on 19th street asking for advice.

So, should Venezuela default on its foreign bonds? If the authorities adopted common-sense policies and sought support from the International Monetary Fund and other multilateral lenders, as most troubled countries tend to do, they would rightly be told to default on the country’s debts. That way, the burden of adjustment would be shared with other creditors, as has occurred in Greece, and the economy would gain time to recover, particularly as investments in the world’s largest oil reserves began to bear fruit. Bondholders would be wise to exchange their current bonds for longer-dated instruments that would benefit from the upturn. (emphasis added.)

At this, Bank of America’s Francisco Rodríguez pounced,

In an article published today in Project Syndicate (“Should Venezuela default?”) two top Venezuelan economists argue that Venezuela should default on its foreign debt obligations. Ricardo Hausmann, a Harvard professor and former planning minister, and Miguel Angel Santos, a Harvard research fellow, argue that the government has effectively already defaulted on the needs of Venezuelans by creating massive shortages,running up arrears and generating runaway inflation. They contend that Venezuela should enter into a debt restructuring while the country gains time to carry out oil investments. In their words,“the fact that [Maduro’s] administration has chosen to default on 30 million Venezuelans, rather than on Wall Street… is a signal of its moral bankruptcy.”

The Kid goes on to say that Hausmann and Santos are the kinds of people the opposition pays attention to, hinting that bondholders … may be safer with a Maduro government than the alternative.

I’m a big fan of FRod’s contrarian streak, which has long been a major counterbalance to the unfettered group think in so much of the opposition, but this strikes me as over the top.

Rodríguez reads RH+MAS’s flight of rhetoric, couched in the conditional, as a technical recommendation to default. It didn’t even occur to me to read it like that on my first go through, and hanging the entire attack – it feels like an attack doesn’t it?- on the word “rightly” is just doing way too much with way too little.

The economic logic at play here is worth going through: as Rodríguez sees it, the day-to-day economic chaos Venezuela is experiencing looks like a solvency crisis, but it’s really just an exchange rate crisis. The country feels like it’s run out of money, but that’s a mirage caused by the wildly misaligned exchange rate.

If that’s so, even discussing default is missing the point: you don’t shoot the mosquito feeding from your arm with a .45 when you could just as easily – more easily – swat it away with your other hand. You don’t default on your sovereign debt when you can just devalue.

For FRod, the economic logic of “exchange rate unification” (basically devaluing the official exchange rate and ending the tier system) is so overwhelming, it’ll impose itself even on the lunatics running the Venezuelan economy, no matter who those lunatics may be.

But notice that he’s locked in his own conditional, too. If the bolivar was substantially devalued then the sense of crisis would dissipate. That’s far from a consensus position. Worse, even if it’s true, I think the political signals are multiplying that there is at least one (and possibly several) veto players in the political system determined not to let it happen.

Here, the incredible opacity of the post-Chávez policy-process really hampers our ability to understand what’s going on. But it’s impossible to miss the fact that the official who had announced “exchange rate unification” as official policy has been shoved off to a non-economic role.

There are many possible ways to read Ramírez’s exit, but none – as far as I know – that see it as a sign that devaluation is coming earlier rather than later.

But Occam’s razor suggests the key veto player is the guy who thinks this is what macroeconomic policy-making looks like: as Nicolás Maduro announces he’ll spend the resources he doesn’t have to deploy another 27 thousand “inspectors” charged with cracking down on “economic sabotage,” at some point you really have to start countenancing the unthinkable: that the problem here isn’t the capacity to pay, it’s the capacity to reform.

Balking at devaluation-cum-unification, at this point, is an act of inexplicable political self-destructiveness. And that is something bondholders should be wary of.

51 thoughts on “Of grandmothers and bicycles

  1. I don’t think Hausman et al. can reasonably read as advocating default. The idea that sovereign debt is safer in Maduro’s hands is really ludicrous.


  2. I read the piece yesterday and also did not get an advocacy but rather an descriptive mode. Santos/ Haussmann painted a bigger picture. Integrated many loose pieces into a whole to show what the regime is up to with their obligations and creditors.

    So far the game has been to move the available funds around to finance emergencies while keeping foreign debt serviced at all times. The windfall from oiler revenues at highest historical prices over the lasts FIFTEEN years have been wasted in populism, propaganda, patronage and pilfering.
    The time is coming for the foreign debt service to default, and IF there were a responsible management of the economy and the public finances, they argue, it should be done sooner to address more urgent needs.

    Again, this regime does not behave ” como un buen padre de familia” , it’s not looking after the common good, and has no national interests, that is Venezuelian national interests as priority.

    All the clowns in charge are puppets, promoted for their greed and incompetence and under control of the behind the scenes power establishment. It has little to do with sanity. In their minds,, they are riding the wave if circumstance, and enjoying their power and Riches while they can, tomorrow , we’ll tomorrow they will see what comes….

    Responsible Venezuelans are weathering the storm, in exile or in the country, mostly watching helpless how the train is going to derail. Foreign powers are also playing their interests and are positioning themselves to gain as much as they can from Venezuelans misfortune.

    Kudos to santos/ Haussmann, and all the other compatriots that continue to be engaged with the nations interest in mind.


    • “Responsible Venezuelans are weathering the storm, in exile or in the country, mostly watching helpless how the train is going to derail. Foreign powers are also playing their interests and are positioning themselves to gain as much as they can from Venezuelans misfortune.”

      I fear that those “foreign powers”, which I call “vultures” are going to be Act II while those responsible Venezuelans continue to watch helplessly. This is not the time to celebrate as Rome burns!
      Devaluing is no solution for the poor. An empty shelf is no better than a shelf of items you can’t afford to buy.

      There needs to be an end to the pilfering! People need to go back to work proud in domestic products for domestic consumption. It will require those who were producers before to dust off the idle equipment and revive old skills and flip the switch on. They’ll need capital, raw materials, help training a young workforce, and protections from corruption, crime, and the re-establishment of a commercial code that protects property, enforces contracts, and rebalanced labor laws.


  3. Well I have to say that I understood exactly the point of RH+MAS’s note. I will probably put the accent not in the word “rightly”, but rather “they would rightly be told”. That was exactly the case of Greece when I remember Roubini and others advising what they called an “ordered default”, even the troika were openly discussing that as a valid option.

    Of course, you can debate that the whole Venezuela-is-not-Greece argument is exactly the point of Greece being unable to devalue it’s way out of the debt crises, or that Greece did not have identifiable sources to resume growth after the shitstorm. But anyway, the point about default did not struck me as unconventional at all.

    Having said that, I admit that being a rather an obscure/technical point, probably talking about default in this particular circumstances opened an unnecessary flank for cheap -political- shots. The median rather unsophisticated Wall Street bond holders and analysts will probably believe that Ricardo and MA were advising default, even when it was totally untrue.


    • This on itself deserves a post: The median rather unsophisticated Wall Street bond holders and analysts will probably believe that Ricardo and MA were advising default, even when it was totally untrue.


        • Oh I totally disagree. (Biffed = missed the chance)? His answer was perfect in my book: Resign immediately and call for elections. That’s the position of 2 of prominent and respected economists whom I think many people listen to. This is not an economic problem, this is a political problem and defaulting might be the best thing to try to save Venezuela, it will not be done by Maduro, but maybe these 2 economists know very well that making it harder to get loans for the current government would accelerate the default to Wall St. would it be better to do it orderly and managed by smart people, yes. It’s that likely? No.


          • C’mon, Moraima, they gave him a very straightforward chance to say: “Jeepers, no, of course I’m not saying an opposition government should default. That would be insane.”

            He very specifically chose not to say that, under what seems like it was repeated questioning.


            • It seems that RH was not talking about anything like Roubini´s “ordered default¨ala-Greece or something like that. I think that I have to withdraw the former comment on this thread, particularly the part when I said that “I understood exactly the point of RH+MAS’s note”


        • Full disclosure though, Santos was my Macro teacher at IESA and Hausmann is of course a legend there. So I might be also falling in the trap of believing they know more than what they are saying and their position is sustained by something else than pure speculation or even wishful thinking. But I respect Santos for his consistency in keeping the needs of Venezuelans living there above anything else. FRod has another boss, an investment bank, and we know how those deal with “moral” questions.

          What I hated most of that bloomberg piece was the quote from FRod:
          ““Venezuela has more than enough foreign currency earnings to both ensure an adequate supply of imports and meet its foreign obligations,” Rodriguez said in a Sept. 5 note to clients. “Current scarcity levels are caused not by the need to service on the country’s external debt but by the massive distortions to relative prices that have resulted from the country’s tight price and exchange controls. Resolving these relative price distortions, rather than defaulting, is the key to restoring Venezuela’s macroeconomic health.”

          I really would like to corner him in some corner and just tell him how can you know that??? How??? I like contrarian people but FRod is not one of my favorite people in the world right now.


          • He has connections. I wouldn’t be surprised if RRamirez made promises to him (that he meant to keep) and FRod believed him. In exchange for support from Wall Street. Now it appears RRamirez is not going to keep his promises. RFrod must be burning inside.


  4. Found it funny: the only people I heard jumping to the conclusion that RH/MAS were advocating for default were investment bankers.


  5. My guess is that Venezuela will make this round of coupon payments and will default in the next.
    Default means…
    Venezuela will not be able to import food.
    When that happens…
    China will present its offers and…
    Venezuela will accept them gratefully.
    End of story.


    • I hate journalism like this: “Fuentes del mercado internacional explicaron que la publicación en Project Sindicate de un artículo firmado por los economistas Ricardo Hausmann y Miguel Ángel Santos generó una ola de nerviosismo entre los inversionistas de títulos de la República y Pdvsa.”

      Not only do we not get names for which investors are supposedly nervous, but we don’t even have the identity of the person or persons who made the claim.

      It’d call that “dubious”.


      • You are right indeed. Now, I wonder if we could find a way to gauge the supposed nervousness of said investors. Was there any trade we could check?


        • Venezuela 14’s (due in a month, October 8th) are trading at 98-99 points on the dollar, to yield between 17-22% in YTM. That’s a clear signal of distress on the market, especially considering that these bonds traded at near-100 for months already, this sudden drop happening the days after the Sacudón.


      • Really really lazy.

        For me it’s extra clear: what spooked the markets was Maduro’s genuinely terrifying announcement that 99%+ of the money deposited in the parafiscal funds is gone. If you weren’t spooked by that, why on earth would RH+MAS spook you?


  6. If the regime defaults (because it finally comes to a point were it doenst have the money) it will argue that the imperialist wall street blood suckers are the following the script of a fiendish plot to destroy the Revolution and the Venezuelan People . Then a deal to re organize the debt will be very difficult because of the political rethoric dominating the debate in Venezuela . There will be no credible plan to return things to normal since that would mean admitting that the regime failed and must make ammends which they politically and ideologically will find impossible to do!! . If the oppo replaces Maduro then there is a better chance that what is proposed is an ordered default including a plan (congenial to the reasoning of international economists) to set things aright in a given period, and the blame for that will be much easier to assign to their predecessors . !!

    If a default is going to happen it will happen because the regime must choose between using the available forex to meet the basic needs of the population (which is dependent on imports) or paying its financial creditors and is forced by circumstances to chose the former. The key question here of course is the amount of oil revenue that Venezuela can hope to produce in the future which in turn is dependent on the ability of Pdvsa to cope with the crisis which it is now facing in its efforts to maintain production .This is a crisis nobody sees and which may well prove the regimes undoing .

    Available oil income revenue is dropping because refineries and conventional oil fields have lost much of their past productivity and it is very very difficult to come up with the money and the competent technical management to sort out this huge crisis . The import of algerian crude signals a change in the way Venezuela in future can maintain its oil revenue as production of conventional crudes fall and has to be replaced which much harder to produce extra heavy crude which in turn must be processed or blended with expensive products or light crudes in order to be able to market it .This changes structurally the business of selling oil for Venezuela making it much less profitable. This loss of revenue can have a big impact in venezuelas capacity to pay its creditors .


  7. It’s all about demagogy, populism, and the elections coming next year.
    Maburro is desperate to keep the lie about the “best minimum salary in all the world at 650$/month”, unifying the exchange rate would kill that lie.
    And let’s remember that this regime prefers more to keep its lies than it worries about the lives of people (April 11 for example, the corpse sent his death squads to slaughter people to say there was a coup)


  8. I think the most probable outcome is for Maduro et al. to throw themselves on the mercy of the Chinese. Even if they get a bad deal, the Chinese will co-operate in hiding the unpleasant terms of any loans, and the Ven. government can claim that their “enemies” were pushed back with the help of “fraternal socialists”.


    • Bingo! Didn’t R.Ramirez go to NY a few weeks ago to get support from investment community there (F.Rodriguez) in exchange for promises to fix the exchange rate?


  9. If we look a bit further from this ill advised diatribe between fine economists I really get one conclusion: cuando el río suena es porque piedras trae.

    A week ago only a few loonies out there mentioned the risk of default. Maduro’s speech a few days ago sparked interest because of the 750MM left in the pigy bank. From there speculation rose about the capacity of this government to pay debt. Does this administration have the funds stashed away somewhere? are they planning to default? will they? do they/we know what’s truly at stake here? Again, just the fact that we are contemplating the pros and cons of a possible default in October, a month from now, not in a year, not in 18 months, a freaking month from now! is proof enough of our dire straits.

    Again, a month ago, all the talk was about a hike in gas prices, of unifying our FX policy, fixing, or at least putting some sense in to our economy. All that is forgotten, our cancerous patient, the one whose treatment we were debating (chimo? radio?), but were sure had a cure if it just stuck to the doctor’s orders now seems to have developed a very aggressive infection, the likes of which will put him in the grave in a matter of days. So now instead of debating treatments, we are haggling over the will, choosing a plot in the cemetery and so on. The important thing here, what I take away from all this is how the focus of the debate has shifted… for the worse.


  10. Well, excuse me if I don’t respect Rodriguez. His article looks to me like a desperate attempt to cover his backside because his previous assumptions are looking more a more like completely off base and his “reputation” is on the line. people believed him when he said the worst was over and they thought they could still make money out of the disaster.

    And by the way, Santos has been writing on his blog about the fact that Vzla still has options (a negotiated default, an investment fund from citizens abroad to invest in a recovery plan, among other things) He’s been very vocal about the fact that we need to change the government and that letting things follow the inertia and “Implode” was not a good idea.

    I think Santos and Hausmann nailed in the last paragraph. “None of this will happen under Maduro’s government, which lacks the capacity, political capital, and will to move in this direction.”

    So the bod holders should be very wary of what’s coming next, and let’s just say that This “article” by Rodriguez “is not a sign of his moral rectitude. It is a signal of his moral bankruptcy.” If not his personally then of Wall Street system of misinformed investors and unscrupulous analysts.


    • “His article looks to me like a desperate attempt to cover his backside because his previous assumptions are looking more a more like completely off base and his “reputation” is on the line. people believed him when he said the worst was over and they thought they could still make money out of the disaster.”

      This is spot on! I tend to agree with Francisco Rod in that it is not true that the government of Venezuela is literally bankrupt. I, however, find it hard to believe that a devaluation would suffice as the main problem the government faces is a lack of dollars, not bolivares.


      • I disagree in that FRod’s reputation at this point is *so* closely tied to the no-default position that it’s clearly too late. If there’s a default the guy has to quit his job and go open a carwash in Florida or something. There’s no way back for him from that.

        Personally, I think that adds to his credibility, rather than subtract. The guy has real skin in the game, in a direct kind of way most analysts are too milquetoast to put in.

        But yeah, that note was not well conceived.


        • The guy has real skin in the game….I think the real skin is called privileged information because of his past associations.


  11. A man is not deemed to be financially bankrupt if he keeps paying his bank loan even if to do so he stops paying: the bills of his grocer or those of his phone and electrical power provider; the salaries of those who labour for him in his business and puts his family in hunger rations , And yet in wider sense, he is broke to the extent he fails to meet those other obligations he has to other creditors besides his bank .!! This is a point well made in Project Syndicates article.

    The other issue of course is whether such man , by reorganizing his personal finances can become capable of paying all his creditors , Mr Rodriguez view is that this is possible but as Francisco points out there are some doubts that this is in fact possible and furthermore the suspicion that even if it were , the man himself is pesonally incapable of reorganizing his finances in the required way to avoid ultimate bankrupcy .

    The sign is clear that its not easy for the regime to meet all its obligations, that is seriouslly short of the cash its needs even to service its bond obligations and is tapping on all possible sources (Citgo sale) to avoid financial default in the forthcoming year . This indicates that it is not inconcievable that it may become bankrupt even in the financial sense if it is unable to muster resources to keep its other creditors from rebelling whilst servicing its obligations vs the financial world .

    Default if not inevitable is definitely becoming each day a less remote possibility !!


  12. Guys guys I finally figured it out:

    -F.Rod thinks collapse won’t happen because the goverment only needs to devaluate to save its own ass, and it isnt devaluating, so everything must be ok.
    – Yet every single indicator we know seems to tell shit is about to get real.

    How do we concile those to facts?

    Simple: the goverment wants to devaluate, but it can’t, because the real owners of this country are the ones that are benefiting with the absurd exchange rate, and those dont care even a bit about the economic future of this country, because they are just in for stealing as long as they can.

    Thats why both Ramirez and Giordani are out: they wanted to rule forever in their communist utopia a la Castro, but to do that, they needed to take measures before we get close to the new elections. Boliburgers won’t get any of that: they are cleary in only for the short run, getting ready to get out as soon as everything goes bananas.

    So thats pretty much it. Its a Catch 22: Can’t devaluate because they will lose their support (from the Diosdado club) but because they dont they lose support (from the base). They are fucked, and so are we. When this country blows up, nothing will remain, because there was one thing they could do to stop its self implosion and they will never do it, because thats how they were getting their money anyway.

    PD: I believe Quico said something along this lines a while ago, if so, why is he still defending Rodriguez hypothesis about the red adjustment, when we are clearly governed by mad monkeys which have clearly no idea on what are they doing?


  13. At the end of the day what matters here is if government has the moneys to pay its international obligations in 2014 and 2015. This is a math excercise. Any enlightened blogger here willing to take a shot?


  14. To me the problem could be reduced to one variable: whether to postpone the payment to bondholders or not (to default or not). At the end of the day the regime must implement a well-known number of economic reforms in order to fix the whole mess called Venezuela. If Venezuela defaulted the markets would require this as normally in these cases. If Venezuela wanted to pay to health, food and other industries (without defaulting) it would be necessary to implement the reform plan too. Hence, the adjustment is not an option to avoid. I personally think Venezuela must leave “the default option” as the last one on the list. A default will only worsen the situation, blocking the access to markets in the future without any oil boom in the near horizon to help us (as it was in the Argentinian case) and having a direct impact over the economy and therefore over common people.

    However, one question must be answered: Do I think the regime would implement a reform plan driven by its own will? No, I don’t. This would only leave us with the default scenario. But this doesn’t necessary mean the Hausman/Santos proposal would end up being correct. This will only mean the government was too obdurate to carry on a reform plan on time without severe long term consequences. Venezuela will have its adjustment plan, it will pay its debt with different industries within the country but it will also have to carry a heavy burden during the time without access to international financial markets and without a commodity boom to save the country.


  15. Many highly dogmatic people when faced with disaster or put in to a corner turn delusional , go into denial, and start to put their faith in secret weapons or last ditch desperate miracles that will get them of the hook somehow . When Hitler begun losing on all fronts he believed that the V Bomb raids against London would turn the tide, or that upon the death of FDR the allies would start fighting each other . In short they start believing their own lies because emotionally they can never be mistaken whatever the message they recieve from surrounding reality

    The regime high command is now made up mostly of highly dogmatic people ,they think that there is nothing wrong with the model only with the execution , that they can movilize their stalawarts into suddenly becoming efficient, honest and model managers something they have never been or are capable of becoming , that their deepening of draconian controls will be instumental in solving the scarcity problems . That by using more aggresive propaganda they will always maintain a mayority of ordinary peoples support !!

    Of course this is not the whole story but it may be part of the story, Wonder if F Rod when stating that the regime had enough mondey to keep the basic imports going whilst paying its foreing financial debt had the real numbers to work on or regime supplied numbers . Even people inside the whale if they are honest know that the numbers dont add up , that for example the payment of the Chinese loans with oil supplies is big burden that didnt existe before and is not really biting the regimes oil finances.!!. .


  16. Quico, the “KID” is the guy who claimed beyond any doubt (like all of his erred prophecies) that Venezuela was already under external adjustment, given its current-account movements from almost a year, and that the “devaluation-wand” would sort it all out.
    Is that really so that F-Rod seems to present itself as a superior individual, or is it that He might be cozying up too much with the likes of Sanso Baldo and therefore his predilection of becoming the “Planning minister who saved chavismo’s disastrous run on the economy”?


  17. If Maduro keeps playing this game he’ll be toast sooner than later. He is a highly unpopular jackass, and I would guess deep within chavista ranks as well. In that regard it is interesting to know if he has unearthed any plots against him of late, because now would be the time to worry…


  18. The Chavistas will eventually be forced to print something like this,

    because a default to foreign markets will cause a true currency devaluation.

    Oh God, what a mess these lunatics have created in Venezuela!


  19. On the news front, Venezuelan bonds are trading heavily down today (CDS spreads for 5y jumped 170+ bps and everything is down 4% or more on average, which translates into a +20% fall for the last 6 weeks). Barclays just said that this sell-off presents a very sweet buying oportunity, that the country’s debt service is still manageable, and that a Venezuelan default isn’t imminent. What do you think?


        • Yeah, I think Barclays just wants someone to try and grab some falling knives so they can get out of these trades. Given the size and extent of today’s movements, an outsider to the bond market (yours trouly) is inclined to think that the Hausmann story really rang a bell to retail/fund investors; it got profiled on Bloomberg TV, in fact.


          We have to consider that, to an outsider, the facts of post-chavismo aren’t clearly evident, but juicy 10%+ yields are; so it’s obvious that, after a high-profile Harvard professor gets to tell the facts to a global audience, a desperate scramble towards the exit door seems only logical for a risk-averse investor with information disadvantages.


          • Your last sentence = my thoughts exactly. Hausmann/Santos put the bell on the cat’s collar, thereby squashing F-Rod’s attempt to build a market for Vennie bonds through verbal/written embellishments, designed to highlight his firm as (presumed) broker of record, and to enhance his position as a sovereign bond consultant.


      • You got the report where this came from, Quico?

        Un informe de la firma Barclays Capital indicó que el problema de Venezuela no se debe a la escasez de recursos. “El país está enfrentando una severa crisis debido a la contracción de la economía y a los altos niveles de escasez e inflación. Sin embargo, esto es consecuencia del modelo económico que destruyó el sistema de precios relativos”.



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