Shielding Wall Street from the debacle

Are you comfortable financing this?
Would you be comfortable financing this?

This Reuters article on a Boston forum of Wall Street-type investors is very illuminating. Obviously, the markets are jittery about what is undoubtedly “the worst-managed economy in the world.” But the highlight of the article is a quote by our old foe Mark Weisbrot:

So I rang up Mark Weisbrot, the co-director of the liberal-leaning Center for Economic and Policy Research, based in Washington, D.C. He’s not shy about criticizing media coverage of Venezuela, including how Reuters covers the nation. He believes there will be no default on Venezuelan debt because the nation doesn’t have a balance of payments problem.

“When you get past the ideology and you look at why would they default, it doesn’t seem there would be a reason for it. It is not like they cannot make their debt service payments,” Weisbrot said from Washington.

Of course, Weisbrot is right. As long as Venezuela is exporting enough oil to make their payments on foreign debt, then there is no need to worry. And clearly, we are still in a position to keep our payments.

Yes, the government is still exporting enough to cover our dollar obligations – with some left over for Barbie. Yes, they have also made clear that servicing Wall Street is their top priority, just like any high-priced hooker would say. And still, bondholders are not at peace.

The price for this “commitment” is being paid in the streets of Venezuela, with ever-increasing scarcity, chaos, and social conflict. Just take a look at the latest graph from Datanálisis, shown above (more on that in later posts). The message from Caracas is clear.

“Money for Wall Street? You bet, and it’s going to keep flowing. We’ll just cut imports. We’ll cut every damn import if we have to. But we’ll always have cash for you. Don’t worry about the Venezuelan people, we’ve got that covered – they will never know the reason they have no medicine on the shelves is to keep our commitments to you. To paraphrase Prof. Jonathan Gruber, never underestimate the stupidity of voters.”

This leaves Wall Street traders bewildered and depressed. Back to the Reuters piece:

“I’ll believe it when I see it,” Cem Karacadag, portfolio manager at Babson Capital, said in summing up what the other panelists felt about fundamental economic reforms being implemented by the Maduro administration.

“Some of the fixes we talked about… exchange rate devaluation, for example. They can do that with a stroke of a pen. It is so easy to do. Why is it not happening? That’s the depressing part of all of this, is it is not happening because clearly the vested interests are not making it happen, which means the system has to break,” Karacadag said.

Nobody likes getting paid by a government that deliberately inflicts tragedy on its people. Even Wall Street traders are uncomfortable with this level of wickedness – no offense guys, wink wink. Hence, the mood seems to be – “yes, we’re getting paid, and we’re probably going to continue getting paid, but this is nuts, and we want no part of it.”

It would appear that part of what’s driving the huge sell-off of Venezuelan debt is horror – sheer disgust at what Venezuela’s government is doing to us. They may be getting paid, but they really want no part in this.

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    • Wall Street traders are middlemen, creaming off commissions both on purchases and on sales. You are referring to the clients of Wall Street: pension funds, university and charitable endowments, sovereign wealth funds, mutual funds administering 401(k) plans, crooked Chavistas etc. etc… Some of these clients reside in New York, in Boston (site of the conference Reuters was reporting on), elsewhere in the U.S.A., in Europe and (increasingly) Asia. Neither you nor I knows how much “heart” (whatever “heart” is – obviously an oversimplification) these various institutions have. Pointing misdirected sneers at Wall Street is just prejudice masquerading as being worldly wise.

    • Even if they are heartless, they can have a head (although some days is difficult to find evidence of that too). But this is a no-brainer: yes, the current goverment is willing to pay. It is also willing to make the hellish conditions of the country even worse. Something will give, at some point. Either the goverment stops doing that because they want to win reelections or fear losing power, or they actually lose power and get thrown out by somebody else.

      All of that is risk. You dont need that risk.

  1. I think that, as Quico reported yesterday, the Big Default Debate of 2014 is over. It’s just a matter of time before it happens. And I agree with the Hedge Fund manager you’re quoting: this system has to break in order to reinstate order in Venezuela; and there’s a chance that an external default could be the last straw, the thing that finally killed the 21st Socialism.

    Then, MAYBE, it will sense to buy some Venny or PDVSA bonds at the already-huge-and-probably-increasing discounts. It’s safe to say that, for the country with the world’s-biggest oil reserves, a recovery price of over 40% is likely, although the restructuring process (and all the destape de ollas that will come with it) is going to be long, painful and will most certainly end with an intervention by the IMF (or the Chinese IMF replacement maybe..??).

    • I think the Reuters piece gets at investor mood much better than the F-Rod piece and its throwaway paragraph. Because, ultimately, it all boils down to the fact that Venezuelan economic policy makes … no … sense, even if they always pay on time. It’s as if you lent money to a bunch of Martians and they paid on time, but they always left you wondering about the wisdom of lending money to Martians. At some point, everything becomes too weird.

  2. Well it has to be said that there is a stroke of evil genius in the fact that PDVSA seems to be buying up debt at the absurdly low price its dropped to. So the question begs to asked, isn’t this absurd drop in PDVSA’s (and therefore Venezuela’s) best interest? Isn’t this this in a way a covert re-financing of our obligations?

      • Again, one more person with a condescending attitude towards everyone government-related. Well in fact, govt. and PDVSA have been very active in repurchasing discounted debt in the secondary market not since one year ago, but since more than 5 years ago! They are not in power for nothing, stop thinking they are complete morons, they are not. More than 50% of the PDVSA’14 bond that just matured had already been repurchased by the govt. In addition, it is known in the market that many govt. entities, banks and PF’s actually hold Venz/PDVSA debt. Do you know what will happen to these entities if they default?

        • Venny trader, sounds like you’re making some money trading the volatility and don’t want the party to end. With just USD 1bn in liquid forex reserves, there’s no margin for error. And yes, its safe to say that these guys are complete morons. Their actions betray them.

          • They’ve been buying up debt for a while now, its a hell of a bet if you think about it. They’re making a bundle and actually saving a bundle.

          • The El Nacional Article quoted by Arroz in the following space has BOA stating that Venezuela has yearly oil income of 85 billion USD so that paying its foreign financial debt should be no problem . The BOA income figure appears to be the result of multiplying 2.4 million bls per day at 100 US$ per bbl . This figure is not credible .

            Venezuela’s total production for 2013 acording to the EIA is a bit under 2.5 mbd which if we take out the 750.000 bls per day bbls used to cover the local demand at below cost , heavily subsidized prices reduces the exportable bls to 1.750 kbd , if we additionally take out the 200 to 300 kbd which are sold on non commercial conditions to allied coutnries such as Cuba , Nicaragua etc , financially the actual number of bls exported falls to about 1.450 kbd , if we further deduct the 85 to 100 kbd bls of refined products which Pdvsa imports to make up for its shortfall in the production of refined products required to meet local demand then we are left with 1.350 kbd . Because some 300- 350 kbd of this latter volume is committed to paying the Chinese their loans then the real export volume of venezuela is reduced to about 1 million bls per day .

            If we assumme that these bls are sold at 100 $ per bl then we get an income of 36 billion $ per year , but the fact of the matter is that the costs of producing those bls is not negligible but very substantial , both because of the low productivity , fraud and waste which characterizes Pdvsa operations and beause Pdvsa has to directly fund a whole host of populist projects for the govt and produce the funds needed by the gargantuan apparatus of the Venezuelan govt to cover its highly inflated costs. To make it worse prices are falling substantially as is the production of light and medium conventional crudes making it necessary to produce much more costly to produce and market extra heavy crude than was the case in past years . All of the above means that the net income Venezuela receives from its oil export is much less than the 36 billion US$ per year mentioned above.

            Even with China relaxing the payment terms of its loans the additional costs of diluting the extra heavy crude with imported refined diluents or light crudes and of producing these more costly to produce crudes are certain to affect the capacity of Venezuela to meet over the mid term its heavy financial debt obligations .

            It is worrisome that BOA takes such irresponsibly calculated oil income figures as factual , they are a first class financial institutions and should know better . Perhaps the El Nacional article gave a mistaken figure BOA has never supported . Moreover we all know that the BCV is giving Pdvsa the equivalent of 35 billion USD per year in fake money to help it cover the deficit in its expenses . If Pdvsa had the money this would not be neccessary . For all of the above I tend to concurr with Juan that overall the regime lacks the forex to be able to buy up a substantial portion of its financial debt at deep discount.

  3. I was wondering why, in an article on Wall Street investors, you featured a photo of the Boston waterfront. I then clicked on “continue meeting” and found out the reason: “Boston forum of Wall Street investors.”

  4. Unfortunately, I agree. Adjusting consumption to Cuban levels is part of the revolution’s plan anyway. If you are going to do it at some point what better time than when oil prices are low?

  5. “It would appear that part of what’s driving the huge sell-off of Venezuelan debt is horror – sheer disgust at what Venezuela’s government is doing to us. They may be getting paid, but they really want no part in this.”

    I believe you are being a little bit naïve there. Believe you me: investors have no heart…

  6. There is a piece in todays Bloomberg where the ‘exodus’ from Venezuelan bonds is explained as resulting from the market being spooked by the Finance Minister’s declaration that ‘there would be no devaluation in 2015’ . They dont believe it but are shocked at such nonsense being declared. It says something frightening about the irrationality of a gvt that allows such things to be said.

  7. You see Juan, I have a big problem with your piece. Why is everyone now blaming bondholders after 15 years of resource mismanagement? Surely no one was complaining 4 years ago when liquour stores where stocked with expensive scotch, street kiosks and bakeries with imported bubble gum and everyone trying to arbitrage CADIVI and “haciendo plata”. Well guess what, reality check, it is now time to pay the bills. Venezuela had more than $1tn. of oil revenues in the past 10 years only, this money is nowhere to be seen, vanished among imports, siphoned to offshore accounts, etc. but yes, bondholders are to blame for scarcity nowadays. Gee, that makes so much sense!

    Come on, lets be sensible here yes please? The only reason you are blaming us bondholders is because we have a piece of paper which says how much money we are owed, which means you can hold to our numbers and trace them back. However, why isn’t there as intense a debate on the overall management of the resources? Venezuelan citizens have been ripped off for much larger quantities but no one ellaborates this in a rational and a competent way. Why aren’t there weekly publications of articles about the systematical looting of a nation for the past 15 years? For political reasons, opposition and anti-government think that it is a good idea to pursue the “blame the bondholders, scarcity is their fault” angle because they are running low on ammunition given their incompentence and inability to attract a critical mass of supporters. Good luck teaming up with that bunch of idiots who can’t even add and substract.

    Don’t fool yourself, scarcity is not our fault and more importantly, defaulting on debt won’t solve the underlying problem. Defaulting on us won’t stop what is wrong with the country and you know it, the problem is much more deeper and it will take more than your mickey mouse arguments to explain that. Defaulting is the equivalent of blowing your head off instead of amputating the legs. Also, I am really surprised that people are actually sceptical about the negative effects that a default could have. Ha! Paying us is pretty much one of the very few things this govt. does with rigour. So sure, let’s go ahead and throw that out of the window too! Surely, that will make things much better and everything will carry on perfectly fine then. Bondholders will not try to seize oil tankers, govt. will then spend according to budget, stop giving away money to other nations, credit lines to banks will remain open, y colorin colorado.

    • “However, why isn’t there as intense a debate on the overall management of the resources?” There is.

      “Why aren’t there weekly publications of articles about the systematical looting of a nation for the past 15 years? ” There are.

      Scarcity is not the bondholders fault. Nor is the mismanagement. Default would be terrible. We can all agree there.

      Now, there is to me a worthwhile debate to be had about the morality of lending money to a government that uses it to buy repressive equipment. Would you lend money to ISIS? (Just to put an extreme example) What type of human rights violations are lenders willing to accept and when it is too much? Or it depends on the profits?

      With this last graf I don’t mean to say it is morally wrong. But I think most people can agree, that morally speaking, it is a gray area. One I prefer not to be in.

      • Rodrigo, I disagree that there is an intense debate on the overall management of resources. Blogs and news articles discussed by a minority of the population do not qualify as a widespread debate. Arguments and contributions by dinosaur economists (i.e. Pedro Palma) and Mickey Mouse economists (i.e. Miguel Angel Santos) with no experience whatsoever on how to run anything (not even a school canteen or a lemonade stand) are insignificant, especially when considering their poor track record. What there is, is politics on both sides and people from both sides heavily criticising what both parties do without bringing solutions to the table. A handful of pseudo-specialists in the topic du jour is not a systematic and structured way of discussing a topic (i.e. the same expert that will be writing a newspaper article about inflation one day, will be writing another article about the lack of rainfall or electrical plants the month after). This applies to both the government and opposition.

        Morality? Let’s not discuss morality please. This is a never ending discussion and it is not the right forum to take it on board. We could try do so though, why don’t you write an article on it and we start commenting on the back of it? I will only expect that when you hint about Venezuelan/PDVSA debt holders being inmoral for lending money to the govt. (well actually, I see it more as lending money to the nation/country but that is because I am not an extremist, and I know you clarified that you don’t imply it is morally wrong but you flirted with the idea) then I would expect you to also go into details around the wide spread use of the dollar as a reserve currency for example, which in practise is pretty much lending money to the U.S., which we know also engage in human right violations which have been thoroughly documented. Same goes for lending to the Chinese, U.K., etc. This types of discussions are the discussions about what goes on in the “real world” vs. what goes on in the minds of academics and pseudo specialists.

        • I agree with you. I don’t dare to discuss morality. It requires monumental studying and thinking. Philosophers have been jailed in the US for not paying taxes to a government that supported slavery for example.

          Indeed you are lending money to the State. But today there isn’t much separation between State/Government/Party. I think that’s obvious but maybe you would like to refute that.

          I do think it is a difficult discussion. As a lender you can acknowledge the possibility that the money will go to guns or hospitals, but you ignore which. Lenders and investors (it is my perception) prefer to not know. Ignorance is a bliss.

          Whether the current public spending discussion forums that you deemed as not worthy is what we have. For better or worse. I wonder if it is different in more “advanced” democracies. Again, there is a political philosophy question in the background to be answered here.

          But I think we both agree that it is an important discussion. One that needs to happen. The reason I don’t dare to write about it is because I lack fully formed arguments.

    • In most civilized countries, if a barman fills a customer’s orders until the costumer is completely sloshed then let’s the customer take his car to drive home, if the customer rams his car in an other car and kills or maim someone, the barman is liable for the injuries and wrongful deaths. Actually, in quite a few places, the bartender can end up in criminal court for being an accessory to a negligent homicide. Tough on bartenders but very efficient.

      I agree the same legal theories do not apply to sovereign bond holders. But maybe it should : Lend your money to an irresponsible or lawbreaking government, not only you don’t get paid back but you may end up having to compensate the debtor country’s citizens as an enabler of an unjust and corrupt rule…

      • Problem: the same people elected, and repeatedly re-elected the said government. If Wall Street is liable for bad governance, then it certainly is entitled to influence governments abroad, and US government is certainly entitled to listen to a major sector of it’s economy.

        In other words, if W.St. is liable for damage done to Venezuela, US is entitled to imperialism.

        I’d prefer W.St. not being liable for such damages, thank you very much.

        • If Wall Street is liable for bad governance, then they don’t lend to bad governments. Then the bad government goes bust and gets replaced.

    • “Why aren’t there weekly publications of articles about the systematical looting of a nation for the past 15 years?”

      Are you addressing this “critique” to Caracas Chronicles? I mean, 2002.
      In the last 4 months or so your investment haven’t been lucrative. So at this point all participants including you will be better off in the future, if you just sell.

      • No, I am not addressing this “critique” to Caracas Chronicles specifically. Lemmy, Lemmy, I don’t take financial advice from anyone so please keep it to yourself. My financial decisions are the product of analysis.

    • I’m not making the case for or against default, in fact I have largely abstained from the whole debate (finance is not my strength). And I’m certainly *noy* blaming scarcity on bondholders, but rather on Venezuelan officials who choose to pay bondholders instead of reforming the economy.

      However, I do think that there is a moral element to holding bonds for the Revolution. Like it or not, bondholders are major players in this unfolding drama, and it’s fair game to question the role they (you) are playing.

      • Well, but you see, it is not at the expense of reforming the economy, as you describe it. It is not black or white. As I described, there are serious implications for the whole country (govt., people, institutions, etc.) if a default takes place. However, you only see it in the light of a group of bonholders getting rick at the expense of the reformation of the economy. Regarding moral elements, please read my comment to Rodrigo. There is a moral angle on pretty much anything money-related if that is the case. Why don’t you guys write an article about it and we can go into a debate about it.

  8. “It is not like they cannot make their debt service payments,”

    Another victory for the usage of English. Glad to see that UofM education really paid off for him.


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