F-Rod and Hausmann at it again

A few months ago, Harvard. Now they would need to rent out Caesar's Palace.

A few months ago, Harvard. Next round, Caesar’s Palace.

The weekend negotiations between Greece and her creditors was quite the spectacle. One of the many lessons we can draw from it is that it’s really hard to be a left-wing populist when you’re presiding over a bankrupt economy. Sooner or later, you have to face reality.

Speaking of Maduro … when will Venezuela have to face reality?

So far, we’ve been cutting back on our imports in order to continue paying Wall Street. That is simply not sustainable – sooner or later, the pressures on the domestic front become too large. So, when the time comes to make hard choices, what will we do?

Two of our most prominent economists are going to the mat on this issue today.

According to Bank of America’s Francisco Rodríguez, quoted by El Universal, Venezuela does not need to go to the IMF: we simply have to get our prices right (eliminate subsidies, price controls, exchange controls, etc.) and go and borrow from international financial markets. In F-Rod’s view, Venezuela simply needs to adjust its distortions and borrow from Wall Street, or even from other organizations such as UNASUR. (Hmm, I hope that was the journalist misquoting him … )

My initial impression upon reading this was that F-Rod’s suggestion is tantamount to doing what the IMF would demand Venezuela do anyway – straighten out public finances and do away with distortions – and at the same time get the money you need for the time being from banks.

The problem is that going to the IMF would entail doing the same things Francisco is proposing, but would undoubtedly be cheaper than getting it from Wall Street. So yes, Francisco may be right from a theoretical point of view, but I doubt it’s convenient for the country. It’s like saying “don’t go borrow from your mom and dad because they will scold you, just do what they are going to tell you to do anyway, and borrow from your credit card in the meantime.”

Ricardo Hausmann goes much further. In a scorching Facebook post, Hausmann shows little patience for F-Rod, saying that his suggestions are “absurd.” Hausmann says Venezuela faces a severe liquidity crisis, that nobody is willing to lend to the country, and that we are inevitably heading to the IMF because that is what the IMF is for – to bail out basket cases such as us.

Hausmann ups the ante by suggesting that the newspaper’s owners (whomever they may be) are trying to position F-Rod as a possible Finance Minister. He then goes on to suggest that any government that might consider naming as Minister someone who proposes measures lacking any kind of “sensibility” is a government that is utterly incapable of putting Venezuela in the right path.

Ouch.

Personally, I don’t enjoy this whole “so-and-so is positioning himself to be Minister” line of argument. Venezuela’s problems should be debated on the merits, without calling into question the possible motives behind our positions.

Nevertheless, I believe Hausmann is right in that Venezuela does face a liquidity crisis – perhaps as soon as in the next few months. Getting relative prices right is going to entail massive subsidies to ease the pain to poor households, and we are going to need money for that. Come next year, we may not be able to pay our foreign obligations, and the markets know this.

You simply can’t solve the relative prices problems in Venezuela and pay our creditors without a bag of cash to back you up. And Venezuela does not have a bag of cash.

That is what the IMF is for.

37 thoughts on “F-Rod and Hausmann at it again

  1. I just think Hausmann is deeply muddled here.

    You start with a government that insists on selling $100 bills for four quarters.

    A government hell-bent on selling 6800 liters of gasoline for $1.

    Can it surprise anybody that such a government is friggin’ broke?

    Of course it’s broke! If you insisted on destroying value on this scale you’d be broke too.

    FRod’s position amounts to “ermmmm…I bet if we didn’t wholesale destroy value left-and-right we’d have enough dollars to go around. I bet if the government got paid $1 for every dollar worth of gasoline it sold, it’d have enough dollas. I bet if it charged $1’s worth of bolivars for every dollar it sold, it wouldn’t be broke.”

    Hausmann’s position amounts to: “that’s preposterous! You need a boatload of IMF cash instead!”

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    • Well, that’s where the disagreement lies. Hausmann’s point is that Venezuela has used up all its reserves. Correcting relative prices would imply stopping the bleeding, but you’re still left with a boatload of obligations and no money in the bank. So yes, Venezuela has a liquidity crisis even if it were to magically get its prices right.

      In fact, F-Rod recognizes as much when he says that even if you correct prices, you need to issue bonds. He’s not saying “correct price distortions and you don’t need to borrow,” he’s saying “correct price distortions and borrow from ME instead of the IMF”!

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      • Here’s an idea that might drive reality home for Toro:

        Compare the borrowing costs and adhesion policies for Venezuela, between Mr. Policeman the IMF, who would stand for no nonsense from the sovereign nation, and Mr. Softee of Bofaml.com, where “Our first priority is delivering yours,” whatever the hell that means, coined to make the cu$$tomer feel good.

        Then, consider the benefits to F-Rod for landing such a humongous client.

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    • I agree with F. Rod and Toro on this one, I know little about economy, but If we would do away with the insane distortions and somehow avoid to send the entire chorro de petroleo into secret swiss accounts we could definitely have enough to go by. I think dollarization might help. I don’t know if we could survive the transition tho.

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  2. “That is what the IMF is for.”

    But, but, but what about the revolution? What about the left? What about the socialism? What about proving that our childish tantrum wasn’t just a hissy fit??? D:

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  3. Let’s play the devil’s advocate role, so, Would F-Rod be a better Finance minister than Rodolfo Marco Torres or Rafael Ramírez ever were?

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  4. How can the IMF lend Venezuela a single strong Bolivar?

    Correct me if I am wrong, but won’t the IMF demand some kind of assurances that the failed policies of the past must be addressed and Venezuela will have to come up with some ideas to heal the bloated corpse? Those just aren’t the failed policies of the past, but also the present and the future.

    Besides, any money given to Venezuela to heal the economy will probably be diverted to buy military equipment for the invasion of Guyana that will come in early December, which by the way will also cancel the December elections.

    Yeah, laugh at me now, but what better way to stay in power than to invade a much weaker country while saying the crisis has to cancel out democracy.

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    • “what better way to stay in power than to invade a much weaker country while saying the crisis has to cancel out democracy.”

      “Democracy” was cancelled long ago, but it’s a lot easier to just steal another stupid election, some Gerrymandering 101, play with Smartmatic lotto machines, bribe, repress, wash, rinse, repeat.

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    • Are you sure it is weaker… From what we have seen our military’s recent work experience has not been so much in the battlefield. And, from what history tells us, invading a weaker country sometimes leads for stronger counties to defend the weaker.

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  5. “Two of our most prominent economists are going to the mat on this issue today.”

    Hausmann, Rodriguez and the IMF should preface all their Macro-Economic pretty theories with one simple, yet crude and crucial observation: Steal a little bit less.

    Regardless of ANY economic policy, they need to STEAL a little less in Kleptozuela. Otherwise, any policy change or effort anyone can recommend would be futile, and they are doomed to Default.

    Just steal a little bit less. We’ll talk Economics, at any level, later.

    At this point, however, as profoundly putrid as all fabrics of Guisozuelan society are, destroyed economy and rotten Institutions, you would need some some sort of Authoritarian Right-Wing new government, of course. Something like they had in Chile to straighten shit out for a while, educate people, tax them, pacify them, reinstate some order. Pay gargantuan debts and build something. Tough, but necessary.

    I suggest you take a good look at what we did in Singapore, for example.

    – Steal a little bit less; only way is another type of tough, yet Benevolent Dictatorship, quite different than the one you now have. Or get used to Cubazuela2 for another couple decades, with 25000 dead per year and really old cars.

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  6. I’m no economist but it would seem that Greece’s case is significantly different than Vnzla’s, in that the Greeks are part of a common economic framework in Europe with the benefits, demands and pressures that entails – With Germany largely calling the shots. While Vnzla is largely flying nearly solo in economic (hot) air, so to speak.

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    • On a good many levels beyond eurozone membership, the Greek and Venezuelan situations are figurative and literal oceans apart.

      I could write pages on that topic.

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  7. “… when will Venezuela have to face reality?”

    When the reserves are gone. At current burn rates, that puts us at around November/December. However, this could be accelerated if the Iran negotiations come to fruition. The world market will have to absorb another 2 million barrels, or so, a day. That will send the price back down to $30/barrel. Then, we are looking at October.

    When the reserves are gone, there will be no reason for most of the high government officials to stay. Most of them will abandon their posts and leave the country. The rest of the government will collapse from apathy, leaving us with a power vacuum in Caracas and chaos and famine throughout the country.

    There is no longer any way to prevent this. Even if this government decided that the economic corrections were necessary, they are not in any position to implement them.

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  8. Hausmann is right, of course, and Investment Bank Shill F-Rod , as usual, has his head stuck where the sun don’t shine (sorry, ladies). IMF loan interest is ultra-low, but, you must toe the line. Investment bank cash doubtfully would be available, and then only at very high interest, and with major political change–what private investors in their right minds would trust this Revolutionary Government Of Clowns/Incompetents. Any major economic adjustment package will of necessity bring further major hardship to the already-impoverished Poor.

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  9. “Any major economic adjustment package will of necessity bring further major hardship to the already-impoverished Poor”.

    Only because the rich in power steal so much. Way more than what average corrupt 3rd world governments steal. They stole every single oil barrel for 16 years, and then some, since Kleptozuela is heavily in debt and nothing was built. We’ve always been huge Thieves this century, but this decade has been shattering Massive Thievery World Records .

    No matter what Chavismo or the MUDcrap do, eventually, in terms of Economic Policy drastic changes, deeply corrupt Murderzuela is doomed to misery and probable Int’l Default. The only way to avoid 2 more decades of Cubazuelismo is through a completely different type of authoritarian regime, unfortunately, at this point of decadence and putrid corruption of all fabrics of whatever society, economy or institutions still left there. Some form of authoritarian, tough yet productive new government that Steals less.

    Where’s a horrible MPJ or a Tony Tan Keng Yam when you really need them?

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      • I suspect that even if you elliminated every single scrap of corruption in Venezuela youd still have the crisis that now afflicts the country because its largely the result of disastrous decisions and measures on the financial and economic front and a total neglect of even the most basic standards of rational governance plus the effect of the delusional ideological prejudices that poison the mind of the top Chavistas. Corruption is loathsome and should be fought and condemned but we shouldnt have such obscene fun showing off how much we despise it because it distracts attention from whats really behind the disaster that we are now suffering in Venezuela.!!

        Look at the Monk Giordani , not even now no one is saying that he is personally corrupt and yet for years he was the brain behind so many decisions and policies that destroyed the country!!

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        • I agree. The people who think that if we can only correct the economic distortions and eliminate the corruption that everything will be just fine in short order are deluded. The damage to the country and the economy cannot be underestimated. Those who think that it can be fixed quickly are engaging in nothing more than wishful thinking. Restoring Venezuelan to the pre-Chavez era levels of productivity and prosperity will be the work of a generation.

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        • BB’s first sentence: FTW. Add to that financial and economic chaos, the delusional non Chavistas who are pushing for a cash transfer mechanism, never once mentioning the country’s desperate need for a priority: to clean up the garbage, figuratively speaking.

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  10. Esta mañana, tan pronto le”i las incre;íbles declaraciones de F. Rodríguez puse esto en mi blog:, http://www.lasarmasdecoronel.blogspot.com :
    ” Nos aterran las declaraciones de Francisco Rodríguez
    Quienes no somos especialistas en finanzas y por ello escuchamos lo que nos dicen los expertos, las declaraciones del Economista Francisco Rodríguez, en El Universal de hoy, ver: http://www.eluniversal.com/economia/150713/rodriguez-venezuela-no-necesita-acudir-al-fmi, deberían llenarnos de tranquilidad. Sin embargo, nos han preocupado todavía más, no solo por Venezuela sino por Rodríguez.
    Según Rodríguez, “ Venezuela no tiene un problema de liquidez externa grave como para buscar la asistencia técnica del Fondo Monetario Internacional (FMI”), definiendo el problema de Venezuela como “un problema de desequilibrio de precios relativos internos”, concepto que no comprendo. Esto pudiera ser tranquilizante pero se convierte en aterrador cuando Rodríguez agrega que lo que Venezuela debe hacer es : “no llamar al FMI sino dirigir ese tipo de esfuerzo hacia los nuevos organismos que se están creando como: Unasur que debe tener la misma capacidad y calidad técnica que el FMI”. Eso me aterra porque UNASUR no tiene capacidad técnica alguna ni tampoco tiene recursos financieros que le permitirían apoyar a Venezuela. Al contrario, UNASUR parece ser un organismo dependiente de…. Venezuela para sus gastos corrientes.
    Nos aterra igualmente que Rodríguez diga : “Los ingresos petroleros del país cayeron, lo que está acompañado de un ajuste parcial de importaciones y la venta de algunos activos…una política que a mí me parece razonable y comprensible”. Para Rodríguez es comprensible y razonable que se esté vendiendo oro, que se esté acudiendo ya al FMI a retirar sus dineros de emergencia, que se esté condenando al país a un desabastecimiento brutal porque no se produce comida ni medicinas en el país y ya no se importan en la medida requerida. Eso no es razonable, eso es más bien apunta a un proceso de liquidación y remate de los activos nacionales. Rodríguez no menciona la deuda con China ni el riesgo país que hace casi imposible lo que él receta, es decir, que se pida prestado en “condiciones razonables”.
    Quiere salvar el partido, como el otro K-Rod.
    Por ello, Rodríguez me aterra, no me tranquiliza. Y cuando digo esto, lo digo por Venezuela y por Rodríguez. Este Francisco Rodríguez, como el otro Francisco Rodríguez de los Cerveceros de Milwaukee, está en el Bull-pen, pidiendo a gritos que lo llamen a relevar al lanzador de turno, a quien le están cayendo a palos.
    Es muy extraño que el Bank of America/Merril Lynch le permita a su ejecutivo tanta injerencia pública y controversial en los asuntos financieros de un país, así sea su propio país.
    Publicado por Gustavo Coronel en 3:25

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    • BOA/ML le permiten todo, Gustavo, en haras de tratar de desarrollar nuevas comisiones para sus negocios de Investment Banking.

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    • BoAml le permiten pronunciarse con tal que lleguen al banco los pedidos por préstamos a una tasa de interés .. interesante, beneficiando el banco.

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  11. So, F-Rod and Hausmann are the only game in town? I always thought that most folks who went to college in Venezuela were either lawyers or economists.

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  12. More to the point, say we have a magic wand to make Venezuela implement the policies of getting-your-house in order advocated by F-Rod. How long would the Venezuelan economy last without having to go begging for a bailout?

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    • Best case scenario would be something like a handful of the eastern European economies experienced, such as Poland, or Chile in the early-mid 70s, or Bolivia. A middle ground might be Ghana in the early 80s. Worst case scenario: anarchy, dissolution of what little government control exists and a vast humanitarian crisis; we already see some of this happening. In many ways, it is similar to the prolonged collapse of the USSR but a significant difference is that there is virtually no infrastructure to be co-opted by the people who would utilize it.

      Either way, the human misery seen thus far would be infinitesimal compared to what is coming.

      I honestly think this whole debate is shock vs. gradualism and how to fund the interim, regardless of the choice made. While Mr. Rodriguez is a bright invidivual, I’m pretty underwhelmed by the conflict of interest represented in that the Street is the best source of funds. The IMF angle may sound scarier than it is because the reforms that would be insisted upon would, in any event, need to be implemented to correct the balance sheet.

      I personally think a shock/paquetazo is the way to go…but that would take down the government with it, as it did twenty years ago.

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  13. There is a well known aphorism sometimes attributed to Napoleon which declares ‘never atribute to malice what can be atributed to stupidity’ .

    I am reminded of this aphorism when I read in this blogs rabid rants by people who parade their indignation at the countrys current corruption and attribute to it all the countrys many ills, because I truly beleive that however hateful we find corruption most of the miseries afflicting in Venezuela are not due to corruption or fraud or graft but to the waste and economic losses due to Chavismos incompetence , folly , ineptness, delusional prejudices and ideological narcicism .

    To make too much of an histrionic show of ones anger at the regimes corruption however sattisfactory to our moral conceit diverts our attention from what is surely the cause of most of the misfortunes this country currently suffers . It transforms into a melodramatic moral tale what is really a tale of gross errors of judgement and torpid performance. Both have contributed to our current situation but the latter more than the former .

    Korea , Taiwan were very corrupt when they decided on a course of public initiatives which brought them prosperity and economic development and an increase in the living standards of their people , Corruption is loathsome and harmful but compared to stupidity and fanatism they are like kid brothers to the apocalyptic ruin the latter bring into a country.

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    • I respectfully but completely disagree. Korea, Taiwan, China, all countries are corrupt. Venezuela was corrupt under Perez Jimenez. Look at what he did in 5 years. 3/4 of Vzla’s infrastructure. Best economy on the planet, or close. Qatar is corrupt: Except every citizen is rich.

      Obviously they did not steal every penny, did they? Well, that’s what Chavismo does, and then some. They’ve stolen the oil that has not been produced yet.

      So no, it’s not just ineptitude, at all. It’s mainly a pervasive, corrosive, contagious disease called Massive Kleptomania what you have in Guisozuela. You can’t compare a rash to metastasized terminal cancers.

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      • To concentrate solely with such moralizing self flatering relish on the corruption without considering the impact of the other regime flaws and vices (crass incompetence , ideological delusions etc) as the cause of the countrys problems is to falsify its reality , and distract people from phocusing on the most important problems to be tackled . In fact these flaws and vices have contributed to the corruption becoming worse than it was . Corruption is one factor but to make it into the only relevant factor is to diminish the destrucive effect of the other regime failures and misdeeds. Turning the complex situation of Venezuela into a melodramatic morality play is to obscure what is it that must be done to get rid of our problems !!

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        • Far more than morality, it’s basic math: No matter how “adept” a government may be, if they steal 12 out of 9 oil barrels they produced, and every single institution is corrupt, down to the lowest levels of society who forgot how to Earn things by working, there’s NOTHING any one can do to save that country. Unless they start to steal less. In Kleptozuela, that would mean a complete shift to the right, an authoritarian regime that controls things but steals less and builds things back up. See Chile or Singapore of Perez Jimenez.

          Or get used to Cubazuela for another few decades, the most corrupt country on the planet.

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          • How exactly do you steal an oil barrel ?? thats difficult to visualize , the robber goes and takes the bls (by the ways oil is never placed in bls) and places them in his own vessels without anyone noticing , that sounds primitive , like someone that has never seen how oil barrels are physicaly handled and sold. Corruption I fear is a bit more subtle and complicated than that . Is this an effort to demoralize the oppo ??, abandon hope all ye who oppose the regime for they will always thriumph, ??

            In the past the oil industry produced 3.3 million bpd with 40.000 employees , but people actually handling the oil to where it was sold were a couple of hundred , maybe a thousand , in fact they all knew each other personally from working together in years past . You have to reorganize the systems and control and keep it in the hands of a select professional few . You create small elite organizations that do the actual job of handling the contracts and the deals , you dont have to transform the whole organization at one go , you begin small and select and then start reforming the rest piece meal , one department at a time . Also if you create a healthy exchange rate system half the incentive or possibility to game the handling of the oil to benefit your self goes away. dissapears.

            The notions that the use of govt resources is an all or nothing effort is false , you create islands of small functionally well organized honest professional groups , give them the key tasks and at least half the battle is won. Meritocracy works with surprisingly small numbers . The Marshall Plan which restored the economies of war torn Europe was run by a group of no more than 40 people . !! Corruption wont go away that easily but it can be controlled where it cant do the damage that it does in a chaotic system like runs Venezuela now. !!

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  14. Let’s suppose all current distortions are corrected? One floating rate FX market and sell gasoline at international price levels. What on earth leads anyone to believe that would transform the current regime into a much better and honest regime?

    That would concentrate even more economic power in the hands of the government… for the time being at least the bachaqueros have something to say ☺

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    • Per : You are right , the corruption would go on some other way but taking those measures (and others like it ) would be tantamount to taking a robbers AK47Machinegun and exchanging it for a bb gun. Basically you have to give the govt boys no capacity to exercise arbitrary control over the run of private business activities ,or the operation of ‘service providing’ public ones , only then can you control corruption .!!

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