Fonden's Accounting is all Greek to Me

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Coming soon

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.

1 COMMENT

  1. “This report can only be accessed through its research1.ml.com link.
    If you are a BofAML client and do not have this link, please contact your BofAML Sales Representative for access”.
    Are you an official BofAML sales representative?

  2. Erm, isn’t this the same Rodríguez who was issuing a “Buy” for Venezuelan bonds,in his earlier report that painted a rosier picture than what he does now?

    • Yup – his model shows they have just enough cash to keep meeting their obligations through January 2013.

      At that point, they’ll transfer massive amounts of purchasing power from Venezuelan people to the government (a.k.a. they’ll devalue the bolivar) and – ta-da! – their financial problems disappear once again!

      Either way, bond-holders are a-ok. (Lied to, yes, but probably not defaulted on.)

    • Juan, that’s the same funny Roger Noriega who writes those satyrical pieces pretending to be a loony right winger…the same who was telling us about Al Qaeda, Hamas, Hezbullah and several other organisations meeting in Fuerte Tiuna (apparently they work together better on Venezuelan soil) and that Shiah anti-US missiles are hidden somewhere between Playa La Carmela and Playa La Auyama, in Macanao. He should be writing for The Onion.
      If Hugo is indeed seriously ill is another matter…nothing Noriega has a clue about

    • Kepler’s right in his advice, but wrong about one thing – the “loony right winger” role is not an act. I have to wonder if he’s a specific target for misinformation, because they know how easily the guy will go off and write something half-baked.

      • AIO, I was being a wee bit ironic.
        I have been following such blokes as Noriega for some time. They are dangerous even if they are usually just noisy. As obnoxious as they can be, they can be the final element to push a country towards a very silly decision at critical times.

        Some of these blokes are just too much in their little world, “the world according to X” , just gullible, some of them are pen mercenaries and most are a mixture of both things

        There is a relatively young German who was also writing a lot about Iranian missiles, this time in Paraguana (I asked my family to find those missiles every time they go vacationing there but they can’t find them). The German fellow is a Clemens Wergin.
        He even works for Die Welt.
        Alek wrote about him here http://alekboyd.blogspot.com/2011/06/iranian-missiles-in-venezuela.html and I commented there. If you try to find out about his background you start to grasp things: the guy – a German- went to a kibutz to do some civil service, he fell in love with the country, he is a conservative Christian very much in love with blablabla…usual stuff…and then come some people “with special sources” and tell them about a big “scoop”, “this is it”. And then his pieces are above all reprinted in the “Jewish X Post” in Zanzibar or Jerusalem or Miami…and sometimes in the WJP.

        Again, as for Hugo: perhaps he kicks the bucket tomorrow or perhaps he does it on a Saturday night in 2045. One way or the other, we need to keep the big picture: Venezuela is being plundered, it is a time bomb, it is incredibly difficult to explain to the average Pedro Pérez how much money the regime (and others) are taking away from them.

        We need really a lot of “FONDEN FOR DUMMIES” explained in Acarigua and Maturín,Puerto Cabello and Punto Fijo. It’s a big challenge.
        Figuring out how to do it is more important than figuring out if Hugo is going to croack today or tomorrow.

  3. I wasn’t sure if it was legit or not (thought it might be since it wasn’t from the Miami Herald), so that’s why I posted here. I figured someone here might have some other inside info.

  4. Great post, definitely where CC’s strengths lie: making the incomprehensible (for the lay man) economic papers graspable for the ‘bulbo’

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