Venezuela figures out how to not run out of other people's money
There's almost nothing good to be said for sovereign default. Nothing is quite the disaster for an entire nation's foreign investment, for credit access both public and private (the little guys get socked up the wazoo), or for the value of a nation's money and savings than a nation that refuses to pay its bills. Just ask the boobs who ran Argentina a few years back. And then there's...Venezuela.
Venezuela is a socialist hellhole, but it seems to defy Lady Thatcher's iron dictum of socialist regimes: that eventually you run out of other people's money. It's easy to see why: Chavistas have learned to manipulate the international debt markets, quite unlike other communist dictatorships that came before them. They're well aware of Lady Thatcher's summary and apparently have learned from history. So instead of scrapping the failure that is socialism and creating value, which would require capitalism, they borrow cash from capitalists abroad. Russia and China have bought a lot of their issued debt. Chavista elites have bought a lot of it, too. Hedge fund speculators have dipped right in, and so have U.S. investment banks.
Goldman Sachs in particular has been taking heat for buying $2.8 billion in Venezuelan debt. The Venezuelan debt purchases pay Goldman 30 cents on the dollar, which isn't a good deal for the country, money-wise, but it's discounted because no one thinks Venezuela can really go on as it does. For Chavistas, this isn't a problem, since paying the bonds back is someone else's problem down the road. They intend to enjoy the cash now. But the bond issuance and its willing buyers in the markets do prop up the Chavista regime and undercut Venezuela's democratic opposition – even as the country starves for lack of food and medicine. The cash will likely go to Russia and China to pay for their loans to Venezuela. In short, Goldman's purchase wasn't any ordinary sovereign bond buy; it was a lifeline to the Chavista regime.
The Chavistas, being communists, don't particularly believe in paying their bills. They've defaulted on food bills, on oil supplier bills, on medical bills, on airline bills to private companies. They're not very different from Castro, who never paid a bill in his life – and that's who their teacher is. But they also know that should they default on their sovereign debt, they will lose access to any of the credit that keeps their other people's money regime running. That day should have come and gone long ago. But it didn't, because the likes of Goldman Sachs went and bought more of their bonds even as the country starves. This has prompted the Venezuelan opposition to soul-search in the morality of paying these bonds.
Not only have Venezuela's opposition questioned the rightness of paying for this Chavista spending spree, but they've since threatened to make it unpleasant for Goldman, warning the investment bank that should they take power, they may just walk out on paying those bonds.
The ball got rolling on this concept back in 2014 with an article titled "Should Venezuela Default?" by first-rate Harvard economist Ricardo Hausmann. The Chavistas screamed "financial outlaw" and "hitman" and threatened lawsuits against Hausmann, who is also Venezuelan, solely for raising the question of the morality of not defaulting.
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.
None of this will happen under Maduro's government, which lacks the capacity, political capital, and will to move in this direction. But the fact that his administration has chosen to default on 30 million Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude. It is a signal of its moral bankruptcy.
Others have since voiced similar sentiment.
Hausmann has done more soul-searching on the morality of paying these bonds in a piece he wrote a few days ago, titled "The Hunger Bonds," noting the creepy dynamic of what they finance:
You might invest in the EMBI+ because it promises higher returns, or because you want to make your savings available to a larger segment of humanity. But if you do, you will root for Venezuelan debt, which means wishing for really bad things to happen to Venezuela's people.
As has been widely reported in the media, Venezuela is experiencing one of the most calamitous economic collapses ever, accompanied by massive doses of political repression and human-rights violations. So investing in the EMBI+ means that you rejoice when Wall Street analysts inform you that the country is literally starving its people in order to avoid restructuring your bonds.
Your happiness is easily explained: Venezuelan imports, after having collapsed by 75% from 2012 to 2016, are down more than 20% in the first quarter of 2017. That's good news for you as an EMBI+ investor, because it means that more money is left to service your bonds. Meanwhile, Venezuelans are involuntarily losing weight and searching for food in garbage piles. Sure, it's a humanitarian catastrophe. But, to you, it's a fabulous investment opportunity.
Now assume that you want to hold Venezuelan debt because you are hoping that President Nicolás Maduro will lose power and that a more sensible, democratically minded government, more in line with your moral compass, will emerge. Even in that case, you will still want the gains from Venezuela's future recovery to be used preferentially to service the old debt issued to finance the corruption and national destruction brought about by Maduro and his predecessor, Hugo Chávez. You will not be rooting for the recovery of livelihoods that Venezuelans deserve after having lived through this nightmare.
You will also be rooting for US judges to seize assets and impound money to pay you. In fact, analysts who are bullish on Venezuelan debt have been lobbying the government and opposition leaders with an implied threat: even considering a restructuring of your bonds, they point out, will allow those managing your assets to cause havoc in Venezuela.
If you are a decent human being, investing in Venezuelan bonds should make you feel "mildly nauseous," to borrow a phrase recently used by former FBI Director James Comey while testifying to the US Congress. Emerging-market fund managers feel a similar discomfort. They currently spend a disproportionate share of their time "getting the Venezuelan call right," because their bonuses are based on their over-performance relative to the index – of which Venezuela is the main driver.
At a minimum, he wants Venezuela yanked from the JP Morgan Emerging Market Bond Index (EMBI+) to keep Venezuela's rose-sucker dynamic from draining resources from honest emerging markets bonds and to keep Venezuela the pariah state it is.
Venezuela's opposition are right also in injecting an element of uncertainty into bonds for investors, warning that they may not service the debt. If they were operating in a normal even if shambling democracy, it might be questionable, but they are not. They and Venezuela's starving people have been operating in a dictatorship in democracy's clothing for years. They have had so much taken away from them. Only a club to Venezuela's overseas investors might make a difference. It's time for the West to stop bankrolling this vile Chavista regime.