Tail-between-my-legs Chronicles

What's a few disagreements between friends, huh?
What’s a few disagreements between friends, huh?

Venezuela is now the riskiest country in the world. This damning-yet-not-completely-unexpected development is not unrelated with what is happening in Buenos Aires.

Argentina, who for years has been the international financial community’s “enemigo público número uno,” has lost a string of court battles in the World Bank’s ICSID arbitration court. They have even lost battles in US courts. As you would expect, the Kirchners have repeatedly scoffed at the rulings because, you know, tenemos patria, che.

Well, turns out that they are meekly, hurriedly starting to pay up.

The reason? They need money from the World Bank!

Yes, those proud Argentines who have long scorned the international community have now realized that … they need the international community. In fact, Argentina is negotiating a US$3 billion credit line from the same institution it once defaulted. Hence, the markets have responded by rallying to Argentine bonds. The mere hope of rationality in economic policy has made Argentine risk drop. Now, Argentina is viewed as less risky than Venezuela.

This makes one wonder what will happen when Venezuela has to face reality and beg the IMF for cash, something which may be coming down the pipes, if the grapevine is to be believed.

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  1. It bothers me a lot that these risk analyst as their methods are somewhat qualitative. Can people really say that Venezuela is riskier than, say Nigeria? Really? Than Argentina, who recently defaulted?

    A country who has never defaulted and has made it very public that has no intentions of doing that. That has massive incomes. That has the biggest oil reserves (yes, this is not cash, but nonetheless) can’t be deemed the riskiest place.

    These same guys rated derivatives in 2008 as AAA and then went with their tails between their legs arguing that their ratings are nothing but ‘opinions’

    • Like it or not, is all about perceptions. BTW I agree with the derivatives farce… Do they have really the nerve to pretend saying who’s risky and who’s not after what’ve happened. Is like maduro talking about corruption…

      • It is exactly about perceptions and about a ton of sheep dressed as sharks in the financial markets, the traders, that make decisions based on what the other guy is doing and even worse yet, are leaving and increasingly big chunk of the daily trading operations to faulty algorithms in what is called “high frecuency trading”… But, as an example, even with the enormous advances that Colombia has made recently, it is still a country with entire swathes of its territory that are still “no-go” areas, controlled by hostile armed forces intent on overthrowing the government and very little in the field of resources development, while Venezuela, rampant crime notwithstanding, is still a country with no rebel forces and abundant resources. But Colombia’s YTM Stripped Spread according to the JP Morgan Emerging Markets Bond Index is 4.46 bps (WAY lower that the 5.89 bps of the EMBI Global) and Venezuela’s is about three times that at 12.67 bps.

        That is exactly the widest spread against the 10 year treasury bond in the emerging markets, and that is against shining examples of stability like civil unrest-torn Egypt (7.71 bps) and Honduras (10 bps), the reigning murder capital of the world.

        But you expropiate one, ONE lousy heavy crude project in the east on the country and they’´ll NEVER let you forget about it, the fiends…

        • “Sheep dressed as sharks” ??? “faulty algorithms” ???

          It seems you distrust how real markets behave. If bond traders act in unison and follow ‘faulty algorithms’ they will eventually follow the other ‘sheep’ right off the cliff. It’s only those bond traders that dig deep, uncover hidden financial data, think in logical financial progression and study historical trends which will be rewarded with financial gain. There are winners and losers. That’s how a real market works.

          • Should I mention that the WHOLE crisis of 2008 and 2009 was based on the very fact that no one saw the need to “dig deep”, “uncover hidden financial data” or “think in logical financial progression”, and especially NOT “study historical trends” on the U.S. mortgage market? And whoever tried to inject a little logic into the market, like Nouriel Roubini, got ignored and dubbed funny nicknames like “Dr. Doom?”. People kept pouring money on faulty assets’ bets following pie-in-the-sky research that said the normal cycle of appreciation and depreciation of assets was a thing of the past? Shall we go a little farther past to the dot.com bust, where stock valuations where expected to keep climbing forever?? Mi querido Doctor, I am a financial journalist by trade, I have seen it happen again and again…

          • And if it where the traders’ own money they put on those faulty bets, go ahead and jump off the cliff with the rest of the kids, but the biggest part of the money to funds those stupid bets came from pension funds dealing with real people’s savings, not with a 30-something trader’s desire to purchase his first Porsche… But the blame and the consequences have fallen mostly on those people with a “real job” like carpenters or office clerks, who have seen their savings evaporate, and not on the obscenely overpaid “market whiz” with an Ivy League college degree that was supposedly paid that much to increase those people’s retirement assets…

          • Faustus,

            Economics is not a science…well, an exact science or a “natural science”.
            Real markets do not follow laws like in physics. Economics is based on simplifications. Time after time people put in misinformation or they are simply ignorant.
            The market is just made out of people, the “invisible hand” and all that are just metaphors.
            And Tom has said it= this has happened already.
            And yes, there are faulty algorithms and I develop software all the time.

          • It is with amusement that I note, being a financial analyst and all, that you purposely left out ‘government’ in your analysis of the 2008 mortgage crises. Hmm. Er, why is that? It seems to me that you’re already half way down the cliff……

          • Real market? you call that real market? Don’t try to fool yourselve for ideological reasons. The whole finacial markets systems is designed to make bankers whealthier rather than function as a reliable source of financing for companies where investors put money and bet. No my friend, the markets are designed to make you and me loss money. Not the hard working trader you are talking about. BTW no soy chavista y nunca lo he sido…es solo la verdad

        • I doubt that any of the countries you mention has a humongously clusterfucked fiscal framework than Venezuela. On one hand, the sheer uncertainty about how much money goes into and out of the enormous parafiscal funds in VEnezuela, the finances of the state are a black hole nobody has a clue about. On the other hand the foreign exchange market, there is simply not a parallel in any of those countries to the 700% spread between the fiscal and the black market rates and the drainage that it implies to foreign exchange reserves. I don’t think any of those countries has anything that can even start to compare to the massive, bizarro fuel Venezuelan subsidies. You also seem to get caught up in the formal definition of “civil unrest,” but the reality is that the VEnezuelan murder rate might as well be higher than Honduras (although, again, we don’t know due to Bolivarian censorship of murder statistics) and I’m positively sure that it’s much higher than Egypt’s, even taking into account the recent government-led massacres.

          • I agree with some of your points here, but you have to remember that investors don’t move and mostly don’t even visit the countries they are going to invest in so they don’t care about crime or corruption. They do care about whether the Government overseeing the contracts they are signing is going to respect its commitments or is going to remain in power enough to honor them, and given the kind of grasp that the current Government has in Venezuela, I do not think it can be doubted they will remain there for a while at least. And Venezuela has some of the largest crude reserves in the world, crude being the most profitable legal business in the world (maybe only behind arms production and dealing), so it is still strange that Venezuela will have such high spread.

          • Alan,
            You are right on all tye negatives, but you also forget all the positives. Venezuela ius fiscal clusterfuck but also has humongous amounts of revenue. I am not arguing about AAA rating, but the riskiest? You got to be kidding me.

          • My point exactly. C’mon, Angola, still covered in minefields, Cote d’Ivoire with thousands of UN peacekeepers and French troops still on the ground, and fresh-out-of-US-occupation Iraq are all on that list and at a lower risk premiums, and even Argentina, a known and unapologetic defaulter, has a lower ranking…

          • “and even Argentina, a known and unapologetic defaulter, has a lower ranking…”
            You sound as if Argentina’s default was Nestor Kirchner’s whimsical decision, and that’s how most of the financial community has chosen to portray it, but the fact is that he had no choice whatsoever, the country’s economy had imploded like never before in its history, the alternative was to impose cuts on basic social services on a people that were on the brink of burning the Casa Rosada to the ground. Remember that several presidents were sworn in and quit in the matter of days, simply because none of them had the guts to face the reality of what had to be done in order to minimally mitigate the fiscal ruin left by the Menemato. Yes, Kirchner exploited the situation politically without any scruples whatsoever, seizing the opportunity to engrandize himself as the Salvador de la Patria when he had favored the corrupt privatizations and all the rest of the “free market” policies imposed by Menem, and part of that aggrandizement implied using inflamatory rethoric blaming the banksters as if he hadn’t colluded with them in the country’s debacle… but the default was going to happen regardless.

          • What I am saying here Alan is that, rationale notwithstanding, they defaulted on their debt, something that Venezuela has not done for YEARS, and still the country arrives detrás de la ambulancia on debt spreads, meaning the markets are still willing to loan more cheaply to Argentina, with a proven and recent record of not honoring its commitments, than to Venezuela, awash in resources and with a far cleaner credit record. That is, a lot more, about skewed perceptions and “commie-fobia” in Wall Street than about market realities.

    • Well it’s a tricky one because on the one hand Argentina is a much saner country institutionally speaking than Venezuela. There are important policy parallels between Kirchnerismo and Chavismo, but the Kirchners never managed to capture all the powers of the state and of society to the extent Chavismo did. The judicial system is perhaps the best example, but take, for instance, labor unions: corrupt as it may be, the fact is that the CVG here is a power on its own, and it is definitely not bending over to Cristina. The economy here is also much more diversified, even if dependent to a great extent on soy monocolture exports (which at least are not owned by the state). On the other hand I agree that the sheer gigantism of the VEnezuelan state-owned oil aparatus has allowed politicians to take on as much debt as they wish, and sadly it might allow them to keep on it for a long time, rampant Chavista looting notwithstanding…

      • Excellent point.

        Argentina is desperate for a paltry 1.8 billion credit line. Wow. Perhaps with the recent removal of all of that botox Cristina’s logic neurons have kicked back into action.

    • Rodrigo, bond spreads are set in the market where a very large number of investors interact. So, the high risk associated to Venezuelan bonds is not the opinion of relatively few risk analyst but the aggregation of perceptions, informations, expectations, etc. of these investors! There is a huge difference between risk ratings done by these rating agencies like Moody’s and S&P, and market risk premia, which is what Juan is talking about.

      • Manuel, indeed but that aggregation of information, expectations, etc is largely formed by those few. They are influential ‘opinions’. I understand there is a lot more going on, but I feel there is something rotten about this ratings and that there are a few profiting on this.

        I would like to as JC if he believes (as he is very knowledgeable) that Venezuela will default.

    • Rodrigo,

      When the leadership of a country says that Capitalism is evil and starts expropriating private property, the lenders, who are Capitalists have a reason to worry.

      • Roy,

        As said before, I am not arguing that. But we are not the only country in the world doing those things (Ecuador, Bolivia, Argentina) but we haven’t defaulted and we have way larger income. Again, my argument is not that Venezuela should be AAA, but it shouldn’t be at the bottom of the list.

  2. 20 years ago Ecopetrol got better credit ratings from the Credit Rating Agencies than Pdvsa , which was ten times larger and had huge resources . The reason they gave . Colombia follows stable policies , policies which are absolutely predictable , Venezuela is constantly changing courses , every day there is a new surprise , The market prizes stability , the image of Venezuelas economy is chaotic ( growing more chaotically every day that passes ) and subject to much worse constraints than it ever was , this is ‘read´by the analysts as ‘risk’ thus the high risk ranking we are given . Right now Venezuela cant get any loans from the ‘friendly’ chinese unless it puts up a tangible security in the form of mortgaged future oil supplies , If Venezuela were to issue sovereign debt without any security then prudent money managers would balk at buying it , unless the yield is so high that even if the country goes into default they will have a chance of recovering a large part of their money.
    Venezuela may treat its lenders OK, but it treats all others , including foreign investors and services providers pretty badly !!

  3. As JC is constantly harping on about Venezuela’s bonds and risk he must be praying for a default that will simply not happen. According to Wikipedia the debt GDP ratio is only 19% which is hardly a big risk.

    The risk analysts that cannot see any further tan neoliberal exploitation and the interests of banksters just do not like our policies so letthem go screw themselves. Oil is our game and China needs it badly – hence deals and laons are forthcoming is necessary.

    There will be no defaults and no crawling to the IMF so JC, how else do you8 imagaine that you can oust this government? Hope for a Pinochet as you got in your own country?

      • It probably was Arturo. Venezuela has a great debt to GDP ratio (excluding the debt of all nationalized state owned industries, parallel funds and other off budget borrowing mechanisms).

        Something like how Enron had very little debt back in the year 2000.

    • Venezuela is paying out the nose for the privilege of borrowing from the Banksters. Why would they replace him? Or are the Banksters at the beck and call of some shadowy organization, like the Illuminati?

    • Besides, who said JC is Chilean?

      Muchacho gafo, JC es mas Maracucho que patacones con ensalada y salsa rosada.


  4. The regime is hemmed in between three hard places, it either borrows from the chinese but to do that it must mortgage future oil production which means less money for tomorrow , borrow from the market which means paying through the nose or squashing domestic consumption of imported articles which means more shortages inflation and losses in popularity, Dignity (or ideological conceit ) wont let them go to the IMF. So they are stuck They need to increase oil production fast and that means hoping to find credible offshore investors who are willing to put up the money despite their predecessors sorry fate . More importantly they have to allow the foreign companies to take over direct operations or their sunk. Thats why Ramirez yesterday announced that Pdvsa joint ventures would be given more autonomy , which is tantamount to a confession that Pdvsa lacks the capacity to get production going again.!! Oh by the way Chinese lenders dont read credit ratings they just as for a mortgage on future oil production so if you havent got the production , thats it!!

  5. Well, analysts will be hard pressed to find a larger concentration of imbeciles running a country, so I’d say that Venezuela is indeed the riskiest, despite whatever wealth remains en el subsuelo…


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