Last week, the government trotted out an illegally wiretapped private phone call between Venezuela’s top businessman and its top academic economist. Ricardo Hausmann, the enormously influential head of the Harvard Kennedy School’s Center for International Development, can be heard discussing macroeconomic stabilization with Lorenzo Mendoza, who runs Empresas Polar. Mostly, it’s Hausmann doing the talking.

And the shocker? The shocker is that there is no shocker. A scandal is when someone says something in private that is at odds with what they say in public. The Hausmann-Mendoza call is The Opposite of Scandal.

In private, Hausmann lays out basically the same policy proposal he’s been pushing very much in public for some time now. Venezuela can’t pay its debts, and when a country can’t pay its debts its best course of action is to ask for an emergency bailout from the one international organization that was set up specifically to bail out countries that can’t pay their debts: the International Monetary Fund.

The IMF is, obviously, politically toxic on the international far left. The reasons why say a lot more about the far left than about the IMF, though.

Say you understood nothing about fire, but you noticed that whenever a fire truck turned up at a house in your neighborhood, the people would come out in a terrible state…choking, shocked, horribly burned, sometimes dead.

Now, if you were singularly stupid and viscerally averse to learning and thinking, you might well conclude that fire trucks were evil.

You might start holding candle-lit vigils and street demonstrations to protests fire-stations in general.

You might feel patronized and enraged when people around you who do understand what fire is and how it works roll their eyes dismissively at your antics and pay exactly zero attention.

You may even be tempted to broadcast, on State TV, an illegally recorded wiretap between two influential people in the neighborhood who noticed a house on fire and discussed calling the fire fighters, saying they should go to jail for this outrage.

Was anything even remotely controversial or surprising said in the call? The closest we come is when Hausmann says any deal with the IMF will have to include “Private Sector Involvement”, which is bankerspeak for “private bondholders aren’t going to get paid back in full, obvs.”

But what’s remarkable is how non-challant Mendoza is in receiving the news. These days, with Venezuela bonds maturing past next-year already trading at recovery values, having a right-wing academic openly call for Venezuela to fail to fully honor its debts doesn’t even warrant a gasp from a fat-cat capitalist.

Just the opposite: it almost goes without saying. Everyone’s come around to Wall Street’s consensus that the alternative to an orderly restructuring isn’t payment in full, it’s an out-and-out desmadre, a chaotic default that could spiral into, well, anything.

Now personally, I’ve been an IMF-bailout skeptic on Venezuela over the last three years. I don’t dispute the idea that if a country is genuinely broke, its best option is usually to go to the IMF. I’m not a lunatic: when my house is on fire, I call the firefighters.

What hasn’t been so clear to me is that the house really is on fire. It’s hard to tell, because the government has closed the blinds, barricaded the windows, and won’t give anyone the data needed to figure out whether the smoke alarms we’re hearing are from toast burning in the toaster oven or from a full on blaze.

To me, the first thing to do is have a look inside, and make sure the fire really is a fire. Because if you call the firefighters for what turns out to be a piece of burnt toast you look foolish, and all your neighbors conclude you have no idea how to run a household.

That debate is rapidly becoming moot, though, and for all the reasons Anabella outlined yesterday: the government’s total paralysis when it comes to even modest reforms have probably settled the issue. Maybe it really was a toaster oven fire, two years ago, but at this stage, with the amount of smoke seeping out through the windows, it’s becoming almost impossible to believe it hasn’t spread from there.

Even so, I might still want to make sure there really aren’t any better options for putting out the fire than calling the firefighters. Those guys will put out the fire, yes, but they also turn out with axes to gain access to the site, and those high pressure hoses they use definitely can inflict some added damage to a structure that, lest we forget, is on fire. 

But can you genuinely blame Ricardo Hausmann for putting in a preliminary call to the firefighters to say “listen, um, there really is a whole lot of black smoke billowing out of this one building where I used to be the superintendent, you guys ought to maybe put a plan in place to put it out”?

Only if you’re an out and out psychopath. 

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    • Nope, just Hausmann. Which makes sense, when you think about it. The guy runs Harvard’s CID. Half the people at IMF studied under him.

  1. So, basically, the whole “plot” is that Haussman told Mendoza that he told the IMF contacts he has to start thinking about having the groundwork done for when they need to be involved?

    (Does anybody has a transcript of the call?*)

    I dont share your optimistic portrait of the IMF – they have a long list of failures and a tendency to impose “structural reforms” that are more ideological than practical – but, well. Who are you going to call. Really. Who. Cause if Maduro is thinking the Chinese will come to save the day… they have already enough problems.

    *Kinda makes me feel dirty because the first thing would be WTF IS THE GOVERNMENT DOING instead of wanting to access the illegal thing, but, well, reality is what it is.

    Bonus points if anybody shows me any Chavista reaction to Snowden’s material …

  2. Well, I kind of disagree with the last part.

    See, the key of the issue is not whether there is a fire or not. The key of the issue is that many people already BELIEVES there is a fire AND if you get to be the new superintendent NOBODY will know ex-ante if you are lying on the existence of the fire or if you are capable of managing any fire at all.

    Therefore you would do great use of firefighters appearing in front of the people WITH YOU, just to certify whether there is no fire, or there is a small fire that you will be able manage yourself, AND that they have your back in case the fire spreads, AND that they will be watching closely, ready to tell the world both about the existence of fire and about your capabilities to manage it. The firefighters are THE commitment device of preference, in a world where expectations matter a lot.

    • I agree with that. But that’s not what Hausmann is saying. Hausmann’s position is that there is a fire, it will take $40-$50 billion worth of water to put it out, and that’s that.

      • I know what Ricardo is saying.

        But, what you are saying is that the decision of calling the firefighter is contingent to the existence of fire, and I’m saying firefighters do much more than fight the fire. The are the biggest lenders of credibility, and without credibility any adjustment attempt will fail miserably.

  3. Francisco,

    A small quibble. You seem to suggest an IMF program implies a country is insolvent, or that debt restructuring will necessarily follow from it. But more often than not this is not the case. An IMF program is meant to signal that the country is taking the right steps to correct an existing problem with its balance of payments/large misalignment or to undo a very toxic policy mix. It’s more of a seal of approval meant to reassure markets (and regain market access at reasonable rates). To follow your analogy, most of the time IMF programs are about burnt toast (or a sequence of burnt toast), it’s just that the restaurant clients need someone to reassure them this is being addressed and will not happen again, and that the foundations of the building are being looked at, etc.

    • But that’s why I find it significant that Mendoza offers no push-back at the idea of “private sector involvement”. What you describe may be the case most of the time (and, indeed, firefighters spend more time overseeing fire-drills and handing out smoke detectors than fighting fires) – but not in this case.

  4. Venezuela is import dependent so it must have the Forex to make those imports , That forex comes almost totally from oil export sales , we know how much production there is and the approximate revenue that can be obtained from its sale. We know how much foreign financial debt comes due in the nex few years so the likelihood of a default is predicated on talllying the amount of forex needed for essential imports vs the amount of forex revenue expected to be obtained in the next few years. Chinese loans have not been forthcoming except on very strict conditions during the last few years and are not likely to become a life saver in the future , that leaves two ways to improve the regimes debt payment capacity and avoid a default , one it starves the population of even the most essential imports to shore up the amount available to pay the debt service or it gets some one to provide the funds with which to make the internal changes needed to improve the financial situation and maybe rnegotiate an extention to the current Forex financial debt , private markets are out , they dont trust the govt, the idea that there are assets which can be sold to bring in the needed money is a pipedream for anyone who knows how much the sale of such assets may actually bring in todays condition , that leaves only one final source of future financing , the IMF. If default is to be averted . Dont know what alternative explanation exists that changes the above scenario. (which I assumme is close to R Haussman’s) . The IMF option is a rational option , Im quite certain there are people inside the govt who have thought of it and may even be preparing themselves for the moment when they have to bite the bullet. The IMF may be politically toxic to the regimes radical leftwing conceits , but I cant visualize the alternatives unless we are talking about a real drastic flatenning of peoples living standards , far beyond what this country has ever expected , even the regimes followers .!! Maybe Im wrong and need enlightment . If so will some generous heart provide it !!

    • Talk is cheap, try and remember how many times the regime has announced future purchases or investments and then nothing happens , right now the govt hasnt got the money to buy any russian fighters , nor the credibility to obtain any loans, papers may get signed but then there is no follow up. just hot air …..!!

  5. There are two big issues with the Haussman/Mendoza call. There’s a huge misconception about Venezuela pre-Chavez era, it seems like it was a great nation in its path to become a developed country if it weren’t for Chavez. The truth is that Venezuela was a chaotic country with poverty, rampant corruption, violence, etc. we just had lots of dollars to hide it, and Chavez just exacerbated those malaises to a point where even trillions of dollars just couldn’t conceal them. Now, Hausmman and Mendoza are sending a terrible message to those people that still communes with Chavez’ ideas (even if they reject Maduro as a good heir to his legacy), a message that says that Venezuela’s future will be very much like that that past, the one where a few will take decisions to sell the country to the IMF, World Bank, etc., a country that didn’t include them and saw only for their own interests.

    And I think that whoever thinks like that, may not be far from the truth, a few days after the video came out, an article (perhaps apocryphal) written by Mendoza with twelve points that he considers necessary for the reconstruction of a post-Chavistas Venezuela was published, there he requested an end to capital controls and suggested that the new government should honor all the dollars that the Chavistas promised at official rates, so in short, they think that even after the capital controls are gone, they still want a last batch of very cheap dollars. In the whole document he never mentioned infrastructure, investment in SMB’s, education investment, etc, just a dozen of ways that the government should spent those $50billions Mr. Haussman is negotiating with the FMI.

    From the economic perspective, there’s not enough data to conclude that Venezuela needs any money from the FMI, it’s just a reflex of an old-schooler that suppose that everything can be solved by getting into even more debt. So far, based on Europe’s austerity plans in Greece, Spain, Portugal, Ireland, etc. if Venezuela were to implement half of the things that the FMI would impose to its economy, it’d render the loan unnecessary. Venezuela just need to go lean, we never were, we are not and we won’t be a world power, we don’t need to be, and in the mid-term we are better trying to stay under the radar and behaving as a poor country even if the economy improves, so we’re in no rush to take anyone’s money, as long as oil is still a demanded commodity. So, I don’t believe in Mr. Haussman theories, we need new ideas to a new set of problems, and I think that even before them being not even a little close to be in the position of taking that kind of decisions their dumbness is hurting the little credibility the Venezuelan opposition has, so let’s focus in get rid of Maduro’s government, then they can try to sell us their ideas of how significantly increasing Venezuela’s debt is a good thing to do.


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