Death by a thousand cuts (Updated)

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Coming ... to an airport near you
Coming to an airport near you

There are many ways to make a capitalist country – one with plenty of private companies doing all sorts of business – go socialist.

You can take over the companies. That is what Cuba did in the 1960s. It’s also something Hugo Chávez did with particular sectors – cement, agriculture, oil services, and steel refining to name a few.

But the main way chavismo has imposed its economic model on an unsuspecting population is by regulation – by taking over profits, decreeing basic economic decisions, and downright bullying. In the end, private companies give up and either die … or flee.

Case in point: the airline industry.

It is well known that the government owes foreign airlines billions of dollars. For years, airlines have been selling tickets inside Venezuela at the local currency, under the promise by the government that it would allow them to exchange the cash for dollars at the official rate.

Well, years have passed, and foreign airlines operating in Venezuela are flush with cash – useless, devalued Venezuelan cash that is. The situation got to be so bad that a few weeks ago Spanish carrier Air Europa threw in the towel and said it was leaving the country.

The government seemed to take notice, and they scheduled a meeting. Did Air Europa get their money?

The government basically said they would pay with a combination of cash, government debt, and fuel. In other words, Venezuela has no cash, and it has to settle for useless Venezuela debt papers just to get a percentage of its cash back. Take it or leave it.

You can be sure the market value of what they are getting is but a fraction of what is owed to them. That, my friends, is what you call a loan default. It will probably make foreign airlines leave the country in droves.

The situation for local carriers is not much better. Local airlines have trimmed or downright halted their operations because the government simply does not give them the cash they need for things like spare parts or paying international insurance policies.

If the situation continues like this, the only airlines left in Venezuela will be state-owned carrier Conviasa and Cubana de Aviación.

And that … is just what they’re looking for.

UPDATE: As befits a default, Venezuela’s bonds hit a two-year low today. (HT: @nmcrooks)