Moron Risk

39 stories up on One Liberty Plaza (foreground on the right)
39 stories up on One Liberty Plaza (foreground on the right)
39 stories up on 1 Liberty Plaza (foreground on the right)

It’s hard to pick out which is the more munificent of the money quotes in Katia Porzecanski’s Bloomberg piece about Wall Street investment banker types mobbing the Manhattan law offices of Cleary Gottlieb Steen & Hamilton LLP to grill the lawyers with “what ifs” about the Venezuela default they all expect.

Is the most surprising detail that such a fancy Wall Street Law firm didn’t have enough chairs around to handle the overflow crowd?

The room at 1 Liberty Plaza, in the heart of New York’s financial district, was so packed that some people were compelled to stand in the back, one attendee said.

Is it that the vultures are out in force trying to figure out their angle for the day after?

People are obviously asking themselves not just whether the government is going to pay, but if you end up in a restructuring scenario, what sort of recovery valuations you’re going to be getting,” Patrick Esteruelas, an analyst at hedge fund Emso Partners, which oversees about $2 billion in debt, said in a telephone interview from New York.

Is it that even Lazard – Lazard, of just-relax-and-we’ll-sell-Citgo-for-you fame – has gone distinctly wishy-washy on whether Venezuela will pay?

Venezuela has always proven they’d move heaven and earth to pay their debt,” Arif Joshi, who helps oversee $14 billion at Lazard Asset Management, said in a telephone interview from New York. “They’ve waited so long to adjust their policies that it’s starting to fall out of their control.”

Is it that the Credit Default Swap magic eight-ball now says there is a 3-in-4 chance of default by 2016?

The likelihood that Venezuela will repudiate its bond obligations over the next two years is 73 percent, based on trading in credit-default swaps and CMA data.

No. In fact, the moment you understand why default has completed its journey from the speculative to the imaginable to the possible to the probable and now the likely isn’t in that Bloomberg piece.

It’s in this El Nacional piece, in this quote by Nicolás Maduro himself:

Las empresas calificadoras han puesto el riesgo país Venezuela el más alto prácticamente del mundo, tenemos más riesgo país que naciones que están en guerra (…) o donde está el ébola haciendo estragos”, dijo Maduro durante una jornada de gobierno en Caracas.”

In English, “Credit rating agencies have placed Venezuela’s risk as the highest in the world. We are riskier than nations at war, or where ebola is causing heaps of trouble, Maduro said in Caracas.”

Did you catch that? It’s the ratings agencies that make Venezuela debt risky! Y’know, just like smoke is what causes fire.

It’s not the gobs of debt monetization, the billions of make-believe-bolivars the Central Bank loans PDVSA leading to an uncontrolled monetary expansion and the collapse of demand for real money balances.

It’s not the opacity in public accounts, the drop in reserves, the commercial default, the implosion in the goods markets, or the fact that you need your kid’s birth certificate to buy her diapers.

It’s not the fiscal deficit at 17% of GDP, or oil at $58 per barrel, or the tapped-out Fonden “sovereign wealth fund,” or the fact that the Finance Minister gives every possible public sign that he’s an idiot.

It’s not that the one regime official who announced a semi-reasonable reform that might have stanched the flow got shifted sideways to a non-economic job.

It’s not the Central Bank’s scandalous subservience to the Executive branch, or the fact that it won’t even dare publish basic inflation statistics.

It’s not that PDVSA has missed every production increase target it’s set for itself since 2003, it’s not that its refineries are badly maintained and barely functional, much less profitable.

It’s not that labour laws make it insane for a worker to waste his time working, and unreasonable as well as that is time he needs to spend queueing for basic consumption goods.

It’s not that the investment climate has been so shitty for so long, and the profit repatriation picture so bleak, no one sane even considers putting money into Venezuela.

Nope. It’s none of that. According to Maduro, it’s all a conspiracy, led by some flunkie sitting at a cubicle at Moody’s, someone who for some weird reason has decided to mess with his revolution. That’s why it’s expensive for Venezuela to borrow.

In a weird way, Maduro’s right about one aspect of it: there really is a freakishly wide gap between Venezuela’s ability to pay, its fundamentals (in terms of oil reserves, basic capacity-to-earn-dollars long term) and the risk premiums the country faces. That gap is undeniable.

What Maduro has zero insight into is his role in generating that gap.

He has no clue that every time he talks, the tsunami of non-sequiturs, trite rantings, and nada-que-ver conspiracy theories that spew out makes it painfully evident to bondholders that the Venezuelan economy is run by a moron who’ll never understand what’s happening around him, let alone be able to piece together a semi-workable stabilization plan.

That’s the fear that brought those 170 Wall Street types to that fancy Wall Street law office last week. That’s why they’re on edge.

The one type of risk they don’t teach you how to price in Business School is Moron Risk.