Game, Set, Match…Default

The Championships - Wimbledon 2013: Day One
It was fun while it lasted…

Write it down: November 12th is the day the Great Venezuelan Default Debate of 2013-2014 effectively ended. In a research note circulated this morning to Bank of America clients, Francisco Rodríguez concludes that the Venezuelan state is now so disorganized and chaotic, and it has so little capacity to process and tackle complex problems, that it can’t be counted on to not to make the mistake of defaulting on its foreign bondholders.

The analytical focus here is still distinctive: for FRod, the problem still isn’t the government’s capacity to pay, it’s capacity to make even minimally competent policy. In this view the real bankruptcy isn’t financial, it’s organizational and intellectual.

But it’s six of one, half-a-dozen of the other: by the time even BofA has gone wobbly on the prospect that you’ll keep up your debt service…bueno, what’s left?

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  1. C’mon, …”it isn’t the Government’s capacity to pay…” Ven. crude is (maybe) at $72/bbl., Faja crude is $6 less at $66, cost of production of Faja crude is $66, and that doesn’t include imports of lighter crude necessary to process it, Venezuelan refineries are a mess, 130m bbl/da.are smuggled to Colombia, oil debts to China even if negotiable down in the short-run are 600m bbl./da., Petro-Caribe/especially Cuba 200m+ bbl./da. are felt necessary to prop up the Regime politically, as well as low gasoline prices (650m bbl./da.), and, of course, F-Rod couldn’t see this a few weeks ago when he was touting Venezuelan international debt….

  2. The last paragraph in FRod’s article–which is what the post is based on–reads like this:

    “Much of the recent discussion regarding the likelihood of a Venezuelan default has highlighted that defaulting would be a mistake for Venezuela, given the high costs and limited benefits to the Venezuelan government. It has not shown that the Venezuelan government can be counted on not to make that mistake.”

    That’s it. All FRod is saying is that the Venezuelan government is a slow-moving bureaucratic behemoth that can be slow to react. He calls the government a “low-bandwith” government, i.e., a government that has “lost the capaity to “process and tackle complex problems.” No new news. We all agree on that point.

    FRod does not, however, say that the Venezuelan government will for sure fail to react to falling oil prices and default. He also does not qualify whether its likely or unlikely that it will fail to react. FRod merely states that it is *possible* that the Venezuelan government could fail to react and make the mistake of defaulting.

    Saying that the debate “is over” based on this note is a little exaggerated. What if oil prices rise. Every dollar rise in oil is $700 million in additional revenue for the government. If oil rises $10, that’s an extra $7 billion for the govt, (~70% of 2015 principal and interest due). The debate is not over until they really do default.

    • In a less crazy world, this would be the report that sets markets off on a blind panic, not RH’s amateur-moral-philosophy hour riff. Because it’s about confidence, and FRod was far and away the most high-visibility figure towing the “there’s NO chance they’ll default” line.

      Carefully worded as that last graf is, it’s devastating. When even the people who still think you’ll have the capacity to pay aren’t really sure you have your act together enough to really do it…verga, MacPapas, esto se lo llevó tú sabes quien…

      • “FRod was far and away the most high-visibility figure towing the “there’s NO chance they’ll default” line.”
        Outside of the chavistas in Venezuela, Francisco Rodriguez was just about the ONLY figure saying there was NO chance…

      • Sure, it’s devastating for FRod to say that in writing. But I don’t think it’s that devastating. As much as I hate to admit it, and believe me I hate it, we have seen some important policy action in the last few months that suggests that the govt more or less has it’s shit together—-a straight up reduction in FX allocations, an implicit devaluation by moving payments from Cencoex to Sicad-I to Sicad-II (ergo, raising the weighted average rate), cutting shipments to Petrocaribe, renegotiating Chinese loans to reduce minimum required shipments, etc. These are concrete things the govt is doing to improve it’s hard currency position. And we have more policy action in the future: there has been noise of securitizing petrocaribe assets and selling them to raise cash and giving foreign oil companies acess to Sicad-II to increase investment and get some dollars flowing into the country.

        I think FRod refrained from saying “probable” or “likely” because he really does only think it’s possible the government could default in some sort of very large screw up. Its devastating, but not that devastating.

        Sorry for the bickering, but I really feel I should make this point. As Venezuelans, it’s easy to convince ourselves that our govt is totally moronic. Sometimes, sadly, it isn’t. We have to face that.

        • I will be happy if we don’t default. First, taking that horrible mark from our “resume” will take a long time. Second, if we do not default internationally it means that money will come from somewhere else and that is the internal debt or imports. Chavistas love to talk about socialism and ideology but will never accept food/medicine/entertainment scarcity, and I am talking about basic stuff like beer, toilet paper, and reggetoneros.

        • noise of securitizing petrocaribe assets and selling them to raise cash? Details, details, would love to see how long it will take Caribbean islands to vote against Maduro in the OAS if their new debt holder was some foreign investor…. THAT would be news!

        • Finally someone with common sense here. It is interesting how people underestimate the Govt. If they have been in power for 15yrs+ , they are everything but morons. Clearly, political views cloud judgment. Also, people really fail to understand the big picture here when it comes to China’s relationship with Venezuela. These guys could easily increase financing to Venezuela by an amount much larger than people would ever imagine. It is a strategic partner and part of their geopolitical plan, same with almost every other nation with abundant natural resources. If we just look at what China just put in place with Canada and Qatar, it gives you a very good idea which direction they are taking:

          And well, with regard to Francisco’s post, no comments really. You know what they say, even a broken clock is right twice a day.

  3. OT: How DARE you put a tennis picture on the blog and not put the Great One, instead putting a picture of the Mallorcan impostor…

  4. The weird thing about all of this is that now everyone thinks default is possible, and yet the government is crazy enough to go ahead and NOT default. #PaisDeLocos

  5. Somehow, I don’t see this as big news. It is a subtle shift in FRod’s analysis to accommodate the obviously growing ineptitude of the government. That it took him this long to understand that this government is capable of acting irrationally, tells me that he is not well connected to the reality of the Venezuelan political scene. Financial analysts tend to assume that the players will act rationally, and are often surprised when they don’t.

    • I would consider it “irrational” behavior when there are no good “rational” options available. It is ostrich behavior. Reminds me of a joke: A Chavista goes to an ostrich convention. Just before he arrives, an explosion goes off, and all the ostriches bury their heads in the ground. The Chavista arrives and looks around and sees a bunch of ostriches with their head buried, and he says: “Where is everybody?”

      • Gordo,

        To determine if actions are “rational”, one must be clear about the objectives of the actors involved. I believe that most of the important players in this government know that this farce is coming to an end. However, so long as there is still money to be made (stolen) from the system, they are happy to continue milking it for as long as they can. They understand very well, that if they do what is good for the country, there will be no more place for them and their ilk. Their actions and decisions are those necessary to continue for one more day or week, etc. Analysts, such as FRod, apply the data to determine what is possible and rational for the country. The analysts simply refuse to believe that a nation can be suicidal, even when all indications suggest that it is.

        • I would guess, you mean, it is kind of like game of “musical chairs”, where nobody is worrying about those who have nowhere to sit, instead are thinking only of avoiding becoming one of them. Again, there is no idea how to stop the game!

          • My point is that the big boys are not really worried at all. They all have their fortunes assured and safely invested abroad. When the situation in Venezuela becomes untenable they will not hesitate to abandon ship. As for what happens to the country? They just don’t care: “Tengo lo mio…”

  6. I wonder what Alberto Ramos at Goldman Sachs has to say now? He and FRod were the two skeptical analysts representing wall st. bondholders.

  7. Oh! It would´ve been much cooler if FRod had realized the Dumb-and-Dumber Theory two years ago, or at least two months ago. I mean, seriously, what exactly changed? Is it the Venezuelan Govt more disorganized now than two months ago? Do they have less band-width than by the time FRod´s last report? Are they stupider now? Really?

    So it’s not that they don’t have capacity to pay, but ratherthat they don’t have capacity to think. Classic.

  8. Sorry but Frod what an Idiot… the fact that he either thought they where minimally organized/capable or was biased to favoring them due to his past connections with Chavismo is no excuse for an analyst lack of skepticism; and now that the boat is sinking he wants off what a rat!

    • Every on is in for the assault!

      Cuba and other leeches first for as long as they can,
      Brasil and Colombia long term. China and Big Oil as rescuers of sorts (at a cheaper price that otherwise under former PDVSA technical and commercial competencies)

      Poor Venezuela.

      On the rational behaviour assumption:

      it helps to transfer the thinking and ask who is the actor we are observing the behaviour we are assuming rational (or not). If the subject is Venezuela’s government, many actions would seem irrational, if the actor is a foreign power/ the actions can be better explained.

  9. I don’t know if there is any connection with the FRod report, but the Dolar Paralelo has gone ballistic. Currently quoted at 113.62 on DolarToday.


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