The Bank That Sells $10 Bills for $1

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90-percent-offOver on the FT’s Beyond Brics blog, Francisco Rodríguez explains why saying that since Venezuela can’t keep goods markets supplied, it should default on foreign debt is like telling someone with a toothache that he should call the plumber:

Imagine for a moment that a central bank – any central bank – decided to put up a sign on its front door that said “we sell $10 bills for $1”. Word gets around of the central bank’s Great Dollar Giveaway and throngs of people start massing at its doors. As officials struggle to satisfy people’s demand for dollars, they explore solutions. Maybe they should sell some of those gas stations they bought several years ago. Maybe they should put fingerprint machines at the bank’s entrance to control access. Maybe they should default on the country’s foreign debt.

None of these solutions make sense, because the problem is not a lack of dollars. It is that the government is giving dollars away. No matter how many dollars you provide the central bank with, it won’t be able to keep up with demand. The only way to solve this problem is to change the price of $10 bills… to $10.

This is a theme we come back to often on this blog: blaming shortages on not-enough-dollars betrays a Maduro-scale failure to understand what prices are and what they do: the very basics of economic reasoning.

That the guy on the por puesto can get tripped up over this stuff is understandable but…Ricardo Hausmann?!??

1 COMMENT

  1. You might a plumber trying to pose as a dentist!!!!!
    It is both! The goverment does not have enough dollars and is giving away the few that it has!

    • I’m getting patria in my home since last week.
      2 random hours each day, it might be more, depending on the asshole giving the patria.

      PS: It begins with “electricity” and it ends with “RATIONING”

  2. Of course it *could* be that the guy with the toothache also happens to have a clogged toilet and needs a plumber as well, but the reason he should call the plumber doesn’t have anything to do with his toothache.

  3. Additionally, shortages and misery are part of the plan.
    Are you familiar how dogs are trained? Food is withdrawn from them and then the trainer feeds them with the result that the trainer controls the dogs.
    Venezuelas are for Maduro dogs as cubans are for the Castro’s.
    So the government is trying to control the shortages and misery but it will never eliminate them.
    The cronic failure of venezuelan politicians is not to have paid attention to Cuba.

    • “The cronic failure of venezuelan politicians is not to have paid attention to Cuba.”
      Maybe more like “The cronic failure of venezuelan politicians is not to have exterminated every commie, cubanophile and guerrilla sent from Cuba to Venezuela since the 59.” Also hiding the truth about the numerous armed invasions which resulted in hundreds of murdered venezuelans at the hands of cuban guerrillas.

  4. Im not sure that one can read Hausemans as stating that defaulting is the best choice , but rather that If the regime is not going to take the exchange rate and other measures needed to resolve the root problem, then opting for leaving the country without the basic living essentials ( most of them imported) to continue servicing the govts foreign financial debt poses a moral conundrum where the most moral choice may be to sacrifice the latter to allow the basic living essentials of the population to be sattisfied.

    • Right, but the basic non-sequitur is still there: defaulting doesn’t actually do anything to improve the supply situation. It’s like saying that your friend’s toothache is *so* severe that it merits drastic action like calling the plumber. Culo, meet pestañas…

      • I would’t imagine how many toilet paper we could buy with an extra ~6 billion from defaulting. Assuming more people gets authorized to import it at CENCOEX rate.

          • This is exactly the point. Imported rolls of toilet paper are just embodied-forms-of-$10-bills. If you keep selling them for $1, they will NOT become easier to obtain.

            I don’t understand why this is so hard to grasp. There is no number of $10 bills that can be “enough” if you continue to sell $10 bills (or embodied-$10-bills/a.k.a. imports) for $1.

            Thinking $6 billion is such a big number that it would make a difference is like saying if you bring in a big enough number of plumbers, that’ll make your toothache better.

          • “I don’t understand why this is so hard to grasp.”

            When it is presented in terms of goods that have an objective value, it becomes obvious to everyone. But, the value of currency is an abstract concept. People fail to make the logical connections between the symbol for value and real goods. When you figure out how to explain this in terms that everyone can understand, you will be eligible for the Nobel Prize in Economics.

  5. I can understand why Francisco Rodriguez, who sells government bonds for a living, apparently, would want to firm up the idea that Venezuela won’t default. But I think the problem is deeper than he lets on. The Bank doesn’t “sell $10.00 bills for $1.00.” It sells an unspecified number of tens, at the discount, to a smallish number of approved buyers. So the loss of dollars through this policy hole is not unlimited.

    Even with bolivars trading at the market rate, I think the number of dollars would be insufficient to fund imports, largely due to the destruction of the capacity to make local products which might supplant some imports. When everything is imported, there aren’t enough dollars to go around.

    Hausmann’s article was valuable because he pointed out that Venezuela is already in default, not on its debt to foreign bankers, but to Venezuelans who deserve to be able to buy food, medicine, and necessaries, have good schools, and live in secure neighbourhoods.

    Who should bear the pain of the ongoing need for default, the banks, or the citizens?

    • O.M.G. I’m in love.

      J. Orozco and S. Boyd pack a punch to report Maduro’s paranoid “lashing out” at Hausmann, and the latter’s reaction to “the despotic diatribe of a tropical thug… Zzzzzzing! …He uses his position as head of state to intimidate people who think differently… Bammm! …. The question is not will Venezuela default or not. Venezuela already has defaulted. The question is who gets paid. Venezuela is only paying Wall Street.” Hey F-Rod, you and your company have been outed!

      To Maduro’s finger-pointing that Hausmann is the top adviser of “all these groups that want to inflict economic damage on Venezuela” because drum roll on a reverse delusion of grandeur he lives in “mansions over there”, Hausmann rebuts that he received no payment for his comments Hey, F-Rod, are you listening? and that Maduro’s threats are “evidence of an outlaw government, a rogue state.”

      The last little jewel mentions Hausmann’s public disclosure of his consultancy work (on Harvard’s website). Hey Francisco Rodríguez, when are you going to man up and disclose the murkier waters in which you choose to inhabit?

  6. F-Rod’s guest post is rife with between-the-lines manipulation. Not that the starry-eyed-who-don’t-know-how-copper-is-beaten-at-brokerages-but-love-to-whip-asses-nonetheless would ever figure that out.

    Yes, default is an alarmist position to convey. But sometimes you have to CONSIDER the big guns, when the situation is dire. For Hausmann/Santos and a whole lot of people, but not for F-Rod and his acolytes who cleverly sidestep the muck, if Venezuelans can’t get access to needed medication (among other deficiencies in access to basic goods), it’s time to CONSIDER one of the STAKEHOLDERS in the economic debacle. To more accurately point a finger, one commenter said: “It wouldn’t surprise me BAML is lead book runner for Venezuelan bonds. This is the real moral dilemma.”

    F-Rod needs to disclose his firm’s financial position on the matter to gain any sort of credibility from me. And you, Toro, while wearing your I’m-an-investigative-journalist-blogger cap should be demanding that disclosure from him.

    But back to my accusation of F-Rod’s manipulations, crafted ever so to defend his job and BAML’s position on Vennie bonds. Here’s just the first to jump out:

    “We also find no evidence that these liabilities are increasing over time nor that the government’s external assets are decreasing, other than as a result of the effect that the decline in international gold prices had on the central bank’s reserves.”

    Hooooo-baby.

    Can you say, elections? Watch those liabilities spike — after BAML sells its load of Vennie bonds — and F-Rod knows this, but keeps mum on the topic.

    Can you say, price of oil?* Watch those assets decline.

    —–

    (*) Gasoline prices have tumbled 19% from highs hit in June. And markets are signaling that consumers will get even more relief at the pump. — WSJ, Sep. 11, 2014.

    • Syd, beyond a moral dilemma/obligation, does he not also have a legal obligation to disclose any positions that BAML has in Venezuelan bonds? Wouldn’t the SEC be interested in this as these bonds trade on US exchanges (correct me if I’m wrong) and this back and forth between FRod and Hausmann is certainly affecting the prices of these bonds with comments by FRod tending to support the bonds. Are they treading into murky territory as far as the SEC and US securities law is concerned?

      • I’m not sure if disclosure is legally required among those who write position papers/opinions in finance, specifically on junk (or Brady) bonds, as are those from Vz. I mean, I’ve periodically seen disclosure among analysts, in the now-distant past, but I don’t know about legal bindings. What I do know is that if vested interests are distorted or not disclosed, among scientists, the Wall of Jericho will come tumbling down among peers. The financial realm is more slippery.

        I also don’t know where Brady bonds are stored/exchanged. Back in the early 1990’s, they were a form of debt restructuring (among Latams) with the IMF involved. What I’m somewhat certain about is that these Brady’s from Vz are not on the NYSE or the Nasdaq.

        • Ehmm friend.. Al current Venezuelan bonds are exchange traded, on the Frankfurt Exchange and/or the NYSE for a certain audience (mostly retail). They are also traded OTC (Over The Counter), but the market is transparent on prices (only not on volume or open positions, as also happens with most govt and corp bonds… this market is darker than stocks).

          Nonetheless, I recently found out that a series of PDVSA bonds (the 2014 ’15 and ’16 maturities) were issued under Venezuelan law, so the Govt has legal jurisdiction on them. And also, every PDVSA bond issued after 2011 was underwritten by Russia-Venezuela government-owned EvroFinance MosnarBank, has a tangled legal jurisdiction structure, and trade strictly OTC between brokers and investment banks.

          On moments like these, one has to wonder whether this disconnect would play a role somwhere on the future… I think the market is aware of it (PDVSA bonds yield 1-1.5% more than vene ones). Maybe Venezuela will do a selective default on PDVSA only?…

    • Whatever. Syd is steadfast, determined in her refusal to grasp the difference between a bond trader and a bond analyst.

      Can’t say it surprises me. I’ve had 15 years in this blog to get used to the idea that readers can’t and won’t recognize the Chinese Wall between news-gathering and the opinion pages, and treat editorialists and reporters as interchangeable. That’s a basic role differentiation that newspaper people take as foundational and sacrosanct, the kind of organizational common sense professionals take for granted, but which seems totally lost on readers.

      I suppose trader/analyst is the investment banking version of the same kind of functional split. I don’t suppose there’s any reason to expect people to grasp that traders and analysts are subject to separate and distinct incentive structures and of legal and regulatory requirements.

      But they are.

      • OMG, Quico hears a phrase “Chinese Wall” and not understanding what it really means, loves to drop it in his blog, figuring that not many are wiser and will be impressed by his knowledge.
        FYI: The Chinese Wall is between banking and brokerage: two very distinct practices that should be and are conducted separately. But it’s ingenuous, or disingenuous to think that a brokerage analyst at a brokerage doesn’t know what the brokerage is up to. The delusion of some, the steadfast refusal to try to understand realities then spoon feed us a Quicoconcocted version of the truth is galling.
        Who’re you trying to kid? Kid.

        • Syd: I’m referring to the Chinese wall between journalists and editorialists, i.e., another role differentiation you don’t understand. There are tons of those!

          Traders and analysts are not the same. They are not remunerated in the same way. They’re not incentivized in the same way. They face separate, detailed regulations. They face separate, detailed legal requirements.

          You’ve long made a version of an argument that *would* make sense if FRod was a bond trader. He isn’t.

          The fact that you don’t understand that, doesn’t make it less true.

          • Quico: why are you bringing up a red herring regarding journalists and editorialists? That red herring has ZERO to do with our need to scrutinize F-Rod and your need, as a fan, to protect your Wall Street star.

            Obviously traders and analysts are not the same. That is not the argument. And of course you should know that. That you use this differentiation to deflect our claim that a top analyst at a brokerage knows the data from the bond desk at his/her same brokerage is absurd. Try spinning that to Wall Street, see how far you get with the laughs.

            Really, Quico, it’s time you got a little practical experience in the financial markets. Because your need to pretend that you know what you don’t when you so glibly write on this subject is telling. Join a brokerage. Even one in the smaller market of Montreal will better inform you. And at that point, you’ll be able to see how the data that is produced by the bond desk is received by the analysts in the Economics department, in order to generate their reports — along with a lot of other data from other sources, naturally.

    • Echa a Omar en ese pipote tambien!

      http://distortioland.blogspot.ca/2014/09/sobre-crisis-externas-y-opciones-morales.html

      Honestly, when I first read RH+MAS’s Project Syndicate piece, I wrote it up as a “fun riff” because it seemed OBVIOUS to me that they were making a political argument that wouldn’t really stand up to close scrutiny as an economic argument. O sea, c’mon, the whole notion that defaulting is going to improve the supply situation is hare-brained and silly, and I’m 100% sure guys like RH + MAS understand that as a matter of economic analysis. Their original piece was a fine bit of rhetoric, which could be faulted for a certain tabloid-sensibility but did make you think, but it wasn’t really serious economic analysis.

      What I find really troubling and incomprehensible is RH’s decision to double-down on this in his Bloomberg interview, even after the bonds had hit the fan. *That* confuses the hell out of me.

      • I found myself a little perplex while reading Francisco’s piece and thinking: Oh! How similar our positions are on this particular issue and how long it´s been since we were in the same side of a technical argument. And then I found in one of the last paragraphs:

        “But wouldn’t these adjustments be costly for Venezuelans, leading to price increases and declines in living standards? No. Sure, Venezuelans will pay more for imports and gasoline. But they will no longer have a large chunk of their wealth confiscated every year through inflation”

        That sentence by itself stands alone as pure, genuine magical thinking. The notion that by devaluing the currency you automatically achieve stability is just not true. There are piles of theoretical and empirical work saying otherwise. Credibility is the name of the game.

        BTW, criminalizing Ricardo´s opinions is just preposterous. I have nothing but contempt for this last outburst of dictatorial shit from Maduro´s government. All my solidarity is with Ricardo and his family.

        • Claro. Lo chimbo es que todo el debate sea sobre si Venezuela debe o no debe entrar en default: un debate soso y sin mayor interés. El interesante es el otro debate, el de la viabilidad de una depreciación real.

        • Agree 100% with u @Econ_Vzla. The fact that we have had 30+ years of chronic inflation basically means (in order not to make it too complex of an argument) that it will not go away just by devaluing the FX rate and somehow seeking to balance the budget in a single year. The inflation is PERSISTENT and more importantly, persistently HIGH (2-digits, and now dangerously flirting with triple digits); and Credibility (or lack thereof) plays a major role on it, but it’s not a sufficient condition for success.

          For example, no one has dared to question the credibility of the European troika regarding the austerity packages implemented throughout Europe; nevertheless, the economies are still depressed and deficits haven’t, on average, reduced meaningfully close to the projected goals.

          My view is that you need credibility, but also sustainability on the stabilization efforts: a way to sort this out on the Venezuelan case, is to credibily commit to a stabilization package that sets goals for inflation and budget deficits that do not conflict with each other, but that also don’t conflict with expected inflation rates of the private sector. In other words, you can’t wish inflation away just because you have a powerpoint slide that says that if you move all 3 fx rates to 30Bs/USD you will balance the budget and there would be no pressures on the real economy for distribution conflict (which has been another main reason for chronic inflation in LatAm countries, historically)

    • Juan: Gee, what are the odds that two completely different entities, thousands of miles apart, each set up the same straw man that dares to suggest the fatter one is wearing no clothes?

      How can this be with a symbiosis *Chinese Wall* between a government-that-desperately-needs-cash-for-elections and the brokerage-that-can-make-dreams-a-reality with their rainmaker-wave-a-wand-economist-who-holds-the-same-nationality-as-that-of-the-government?

      I’m *like so puzzled*.

  7. Um, I have a question. F-Rod lays out what he believes is the sensible solution…and it all sounds so reasonable…except aren’t we absolutely sure Maduro won’t take those politically costly steps?

    • Bueno, that’s the reasonable solution to the shortages problem, and yeah, we agree Maduro is going to resist it to the bitter end…which is why shortages are not going to get better!

      FRod wants to maintain that the question of solvency is separate from all this. And that, certainly, pushing a country that’s solvent (from an accounting point of view) into defaulting in order to bring in more dollars that’ll instantly disappear into a morass of rent-seeking is a startling piece of illogic.

      • I think that Haussman/Santos point is that Vzla is already in default, so Vzla is not solvent. Ask Copa Airlines, Sidetur Bondholders, PDV suppliers… there is a very long list of people waiting in line to collect their moneys from Vzla.
        Wall Street is just otra raya mas. Una gran raya, pero al fin de cuentas es una mas.

        • Here in Quebec, the provintial government has a policy of providing subsidized Day Care places for $7 a day. A normal day care costs $30-50 a day. Obviously, more parents want the $7/day places than the province can afford to provide. So there’s a waiting list (I should know, my kids are on it!)

          Ergo, Quebec is insolvent and should default on its bonds.

          WAIT, WHAT?!?!??!

      • Hey Francisco, I think that we don’t have sufficient information to determine whether Venezuela is solvent (since so much of the govt’s finances is a state secret), hence the absurd CDS spreads. What the current economic situation shows us is that Venezuela has serious and evident liquidity issues, and we know from present history that liquidity and solvency issues have this nasty habit of getting along and reinforcing each other…

  8. It is funny that we are still talking about this. Chavismo doesn’t want to default to bankers. We know this to be true. RH and MAS were, IMHO, just having fun calling the government immoral based on its actions.

    Their wording was wrong perhaps. I honestly don’t think they worked on that article more than 30 minutes. They may argue that it will be better to refinance the debt and deal with the macro peo in a different way. But honestly I think Venezuela is not where they spend most of their academic time, whereas FRod does spend a lot of time. If anything RH and MAS were lazy.

    The thing is that FRod’s proposal also falls into the void. The government refuses to devalue. They refuse to stop spending. They refuse to raise the prices of gas. They refuse to be accountable. I find it ludicrous from FRod to say these things and not even consider also how Venezuela could get better financing if they would show accountability. FRod is clearly on the bond-holder side, in the sense that he wants those bonds to pay as much as possible to those bond-holders in Sweden. FRod is a renta distributor for the renta seekers elsewhere. Because like Haussman says (and Toro too) it is also immoral that Venezuela pays the interest rates it pays on its debt.

    And FRod may be right that the problem is easy to solve. But it needs action. He may be right that the government will pay this time around, but at what expense? Will they be able to continue to honor commitments in the future?

    The citgo sale obviously points to the fact that Chavismo will not pay any compensations for any lawsuit. It also refuses to honor commitments with foreign and national companies. It will be just a matter of time before it is the banker’s turn. At least if Maduro continues with inaction.

    If I were a banker I would place my beard on water. Everyone else is on fire.

    • To refuse to pay the pending ICSID awards is to default. Some VZ bond agreements contain cross-default provisions, and noncompliance of an ICSID award certainly would qualify. I wonder if Nicolas realized this when he committed to paying every penny that was owed in international obligations. We will soon know how VZ plans to handle the ICSID lawsuits — a judgement in the Gold Reserve case (($2.1 billion) is expected in a matter of days.

  9. The hardships which the govt is imposing on the population by rationing/curtailing the forex it makes available for the import of foreign goods or payment of foreign denominated debt in order to continue paying the govts financial debt constitutes a kind of default , if you like, a moral defaul (at least if we believe the govt has an obligation towards those it rules of allowing them to access the goods and services needed to ensure them certain minimal living conditions) . In that sense Hauseman has a point in declaring the govt in default of at least that part of its obligations .

    He is also unquestionably right that it is in default as regards the payment of debt to many creditors who are not bondholders.

    However to the extent that it continues to pay its bondholders their coupons and loans it is not technically in financial default .

    The question of whether it is convenient that it continue to pay its bondholders rather than defaulting on their obligation even if that means less forex being made available to pay for those imports required by the Venezuelan population is another one .

    The first response to this is that it is not convenient because by incurring in a financial default it would not improve the situation of its import starved population which ultimately depend on other measures being taken by the govt .

    The second response is that this rationing of the forex used to make imports needed by the general population can continue indefinitely , that there is no limit to the hardships which the govt can impose to the population and that thus it can assure its bondholders that they will always be paid when their coupons and other payments become due.

    Im not sure the latter is true . My own fear ( althought the paucity of information disclosed by the govt regarding its accounts does not allow for any certainty) is that the govt is hard pressed to come up with the money to pay its bond holder creditors this year and that even if it does it will be even more hard pressed to find the money to pay them next year. That the rationing has a reason that such reason may be found in part in the the lower oil revenues which it can expect to obtain in the future from operational and business conditions over which they appear to have no control .

    Production of conventional crudes is declining or at best stagnant , replacement production of much harder to produce process and market extra heavy crude oil will make the oil revenues smaller than they used to be and the size of the debt keeps getting bigger every year. I suspect a financial crisis is looming and that the govt seems incapable of preventing it except by taking measures which it doesnt have the guts to take .

    Is Venezuela going to be able under current conditions to stave off a financial default indefinitely or is it increasingly likely that it will default ?? Maybe thats the question which has to be made ..

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