In a blistering piece for Project Syndicate, they address the main issue in Hausmann and Santos’ controversial article: that Maduro has defaulted on Venezuela’s domestic obligations in order to keep paying for its foreign ones.
The authors make the point that, while you can find historical instances where countries have defaulted on their external obligations but not on its domestic ones, they have never found the opposite – a default on domestic obligations and not external ones, as Maduro seems to be doing. They claim that, given how the government is already defaulting on domestic obligations, “the historical cross-country probability of an external default is close to one.”
In other words, the two things go hand in hand, and it’s only a matter of time before Wall Street bond-holders are treated like foreign airlines.
The part that stood out for me (aside from the obvious indicators of Venezuela being a policy train wreck):
“In our book This Time Is Different, we document how domestic defaults are associated with deeper and longer-lasting recessions and much higher inflation than “purely” external defaults. Though we proceed to observe that historically there have been many external defaults without domestic defaults, the converse is not true: nearly all domestic defaults are “twin defaults” that also involve external creditors. Will the Venezuelan case be different?
Hausmann and Santos are right that the huge extent of domestic default suggests a high risk of external default. They are also probably right that, for most Venezuelans, external default would be a good thing. Default on foreign creditors, as we have noted in the past, is a risky strategy that needs to be compared to other options. But let’s not pretend that such a step is unprecedented in Venezuela’s history. Since Venezuela became independent, defaults on its bonded external debt have occurred in 1826, 1848, 1860, 1865, 1892, 1898, 1983, 1990, 1995, and 2004.”
It’s a good article. Go read it.