Maybe it’s only because I’m a Fonden fanatic, but I really think Francisco Rodríguez’s new research note (link now corrected) for Bank of America/Merrill Lynch should shoot to the top of any self-respecting Venezuela wonk’s reading list. So go ahead and read it now.
Rodríguez and his team have embarked on a meticulous bureaucratic archaeology of the Finance Ministry’s Memoria y Cuenta. In the process, they actually reconstruct Venezuela’s public sector accounts to include the biggest of the Black Box parafiscal funds: Fonden, and the two Chinese Funds.
They use these reconstructed accounts as a springboard to recalculate the overall public sector’s financing needs over the next couple of years and, as you’d expect, the picture that emerges is not pretty.
In the short term, i.e. until next year’s election, Rodríguez figures the government can keep going without having to devalue. That, incidentally, is the main reason he thinks Chávez is likely to win.
But he also thinks what’s in place now is a variation of the Lusinchi strategy: by the time January 2013 rolls around, the state will be running on fumes. A big, socially disruptive devaluation is going to be inevitable then, no matter who’s running the show.
His headline finding, though, is that the exclusion of the two Black Box funds is really a way of massaging the fiscal deficit:
We find that omission of parallel funds from the central government and restricted public sectors tends to bias the magnitude of the fiscal deficit in these accounts downward (Table 2). On average, we find that the central government deficit is 1.3% of GDP higher, and that of the public sector 1.6% of GDP higher, once we include the funds in the fiscal accounts.
The details get pretty technical. Rodríguez argues that the BCV’s contributions to Fonden amount to a depletion of its external assets. From an accounting point of view, this is the same thing as taking out a new loan. He therefore treats BCV’s contribution to Fonden in the same way as China’s contribution’s to the
Cuento Fondo Chino: as a source of external financing, as debt that will have to be repaid.
Rodríguez makes the claim that the
Cuento Fondo Chino and the BCV’s contributions to Fonden over the last few years have amounted to a massive stream of external financing that the government has never reported. The costs of these will require big-time financing.
That’s a polite way of saying that Venezuela systematically lies to its bond-holders, knowingly softballing its fiscal deficit to make its paper relatively more attractive. Which amounts to accounting fraud perpetrated against the people you’re asking to lend you money – different in scale, but not in kind, to lying about your income on a mortgage application.
Of course, using this kind of iffy accounting shenanigan to understate your fiscal deficit is exactly the kind of thing Greece was getting up to 10 years ago.
The only difference, I suspect, is that the markets actually bought Greece’s ruse for a long time, allowing it to access cut-rate financing on terms way preferable to what they could’ve gotten if their true fiscal position had been known.
Venezuela, on the other hand, has been paying Credit Card rates for new debt for years now.
This suggests that even though nobody had gone through and run the numbers as rigorously as Francisco Rodríguez has, the market pretty much priced in the Giordani fudge factor a long time ago.