As mass-scale hunger begins to stalk the Venezuelan public sphere, the moral dimension of lending to a crazy regime comes into sharper and sharper focus.

Juan takes up the theme over on FP:

For years, Venezuela has had a massive budget deficit, sustained only by exorbitant oil prices. For years, analysts have been warning that the Venezuelan government would rather chew nails that allow the private sector to grow. And yes, a lot of that borrowed money was used to help establish a narco-military kleptocracy.

It is impossible to untangle the ethical implications of all of this. Lending Venezuela money is what business ethics professors talk about when they question “winning at someone else’s expense.” Losing money from investing in Venezuela is akin to losing it from, say, funding a company that engages in morally reprehensible acts. (Insert the name of your favorite evil corporate villain here).

Investors in companies with “tainted profits” from, say, engaging in child labor or violating human rights should not get the world’s sympathy, nor should they be bailed out. Similarly, investors in Venezuelan debt have only their hubris to blame.

37 COMMENTS

  1. I agree with this premise, and that includes the Chinese loans. In the case of Venezuela, the inevitably of default is already priced in. I am not going to waste any of my sympathy on investors who bought into such a dicey and high-risk investment. No one should come crying that they “didn’t know”. Any deal that looks to good to be true, always is.

  2. As Hausmann was arguing more then a year ago, hasn’t Venezuela already defaulted? The government has defaulted on its population; starving people of food and medicine to pay the bond holders. The government has also defaulted on almost of of its suppliers, just look at the foreign exchange debts due to the airlines, medical suppliers, food suppliers, auto pats, etc., etc., etc. The only people who have yet to be nailed are F-Rods/Bank of Americas precious bond holders.

  3. There are news report that Salas on advise from his Podemos advisors has proposed to the gabinet the need to declare a default to show that ‘peoples needs come first’ with the opposition of Eulogio del Pino and another economic Minister who argue that declaring a default would be disastrous .

    Its pointed out that the republic’s debt service is manageable and that Pdvsa (who is really the one that has more payments due this year) is already attempting a realignment of its debt obligations with its main creditors .

    FRod appears as saying that a Pdvsa default would allow the creditors to seize Pdvsa’s offshore assets (crippling much of its external trade) and the recievables from its export sales making it difficult for Venezuela to keep open the door to imports needed to meet its basic needs .

    For the first time FRod appears to mention how Venezuelas forex needs are distributed , 20 billion to cover needed imports to keep the population fed , 10 to pay the financial debt of this year, 6 to pay the Chinese Fund and 4 to meet Pdvsa own direct needs ( which I assumme include the importo cost of the light oil and diluents it must blend with its own production of heavy faja crude to be able to dispose of it,) .

    FRods message is that if these imports of light crudes and diluents are impounded then it will no longer be possible for Pdvsa to export the heavy faja crude which now constitutes more than 50% of its total exports.

    The morality of contributing to the total disaster now about to strike the country and its population by benefiting from the regimes crazy policies or decisions or by lending the regime money which it would use in the furtherance of corrupt and wasteful goals seems like a secondary issue considering what we Venezuelans are about to experience……!!

  4. To round up the above message , if we total FRods estimate of Venezuelas forex needs for this year then even if you default , there isnt enough money left to pay for essential imports for the population considering that Pdvsa oil export revenue for this year barely reaches the 18 billion USD mark ( at 36$ a bl brent crude which translates into an average 30$ per bl of Venezuelan exported bl, ) . He also mentions did in his questioning of Minister Salas proposal for a default to be delared .

  5. I have seen some strange math. How much of the 2015 imports are real? Heck, how expensive is a cargo of corn, milk or wheat? We are not importing cars, machinery, planes, telecommunications equipment, plane tickets, etc anymore. Probably most of the “imports” are still fake. The other part that nobody talks about anymore is the cuban colonial tax. That is a lot of money there.

    • The import figure reported for 2015 is 40 billion , 20 billion is the figure reported by FRod , its not just food but all the basics needed by 30 million people for a full year in a country were national productive capacity has been almost fully destroyed …….!!

    • I agree that Pdvsa can do some thingsPdvsa can do or try to do to avoid certain obvious effects of creditor action, some not so difficult , some very difficult , some which wont stop the creditors and some that may ,at least for a while .
      .
      Im not so hung on the seizure of offshore assets because in todays oil market climate they arent probably worth that much ,but then the nuisance value of going after them in international courts will be considerable and dont discount the possibility that despite all profered defenses and barriers erected to protect Pdvsa’s offshore holdings from seizure they are breached by tenacious creditors. Cleary Gotlieb didnt say it would be impossible only that it wouldnt be as easy as some assummed. Which probably correct .

      Most pdvsa cargoes are sold on a property transferred at load port basis so that being owned by the buyers they will not be subject to seizure by the creditors .Protecting the recievables will need having all the money put in the hands of those friendly countries which will involve some problems for certain purchasers and will give countries like china or russia the chance of using the deposited money to collect directly the substantial debts they are owed by Venezuela .

      Then there are all the purchases made by Pdvsa for its own operations on various financial terms already in place .untangling the existing financial and operational logistics wont necessarily be easy , triangulation for example isnt done in a day , it can be tough to structure and hard to implement . In any event Pdvsa lacking the funds has already asked its international faja associates to take the cost of importing the needed blends for the whole 2016.

      You have to think of the thousands and thousands of ongoing complex ineternational arrangements which Pdvsa uses to operate and carry out its business and how it has to change them to continue to operate despite creditor threats and attacks. Thats a really tough challenge for an organization which is already operating almost beyond its managerial limits. Only people who have no idea of the innards of an oil companies operation can see this as something readily doable ……..it is no such thing. !!

      On preferring to default the Republic rather than Pdvsa , that seems to ignore the point that it is Pdvsa not the republic which this and next year will have to make the heaviest payments on its foreign debt. You make it sound as if circumstances allow you to choose who is to default ,from what I hear thats not the case !!

      To other points while defaulting may in the end be inevitable Im not sure its either necessary or desirable , best if negotiations are sought ahead of time to try and rearrange existing financial undertakings giving Venezuela breathing room to put its house in order , but there is the catch for to have any hope of success in those negotiations the Regime will have to promise and commit on taking some tough measures and decisions that make any prospect of a deferred payment credible ……and this is the biggest obstacle …will our current regime from what we know of it take those measures and commitments ??.

      The wager is that it cant ….!!

    • Well, this take this for example: http://www.elpais.com.uy/informacion/vazquez-maduro-firman-cancelar-deudas.html

      120 tons of rice (4 Kg per person)
      80 tons of soy (2,67 Kg per person)
      44 tons of powedered milk (1.5Kg p/p)
      12 tons of chesse (400 gr p/p)
      9 tons of chicken (300 gr p/p)

      That’s USD 300 million. Now let’s say you manage to make that last for a week. 300 millions x 52 weeks is about 15,6 billion dollars. Not far from those 20 billions pointed out by FRod.

      • Not a bad per-capita daily diet for Venezuelans to start becoming accustomed to: 2 oz. chicken/ 2 oz. cheese/ no beef/ no eggs/ no corn/ no wheat/ no paper products/ no personal care products/ etc. etc. …

      • That math is even stranger. First, some rice and corn is still being produced here. Second, 4k of rice per week per person? Just imports?

        • I’m just using Urugayan imports to provide some numbers, don’t take it literally. Those 300 millions dollars of goods won’t last for more than a week (heck, won’t last more than a day nowadays) in the venezuelan supermarket shelves.

          I mean, it was just to point out that 20 billion dollars is not really a big number to provide food and basic goods for 30 million people for a whole year.

  6. We are missing some points here:
    a) PDVSA is an operating company. It does own nothing, the oil reserves, etc belong to the Republic.
    b) VERY IMPORTANT: Lawyers from Cleary Gotlieb stated at a conference in 2014 that the attachment of PDVSA assets is nearly IMPOSSIBLE on a U.S court. (Cleary Gottlieb is the law firm hired by Argentina to deal with the fondos buitres.)
    c) As per the diluents and stuff: They always could triangulate that through a different company that of PDVSA.
    d) As per exports: Foreign vessels could load oil at Venezuela’s ports. Once the oil is in the boat, it belongs to the client, not to PDVSA.
    e) Lots of “paises amigos” would be willing to receive the money from the oil sales: China, Russia, etc. So the “freezing” of oil assets is very difficult (plus the legal difficulty to enforce such embargo. )
    f) ASk Elliot and co. how difficult and long process was to deal with defaulted Argie debt: more than 10 years, its true, they cashed in big.. BUT remember that during those years they were only able to seize the buque escuela, and few accounts…
    g) contrary to popular wisdom, I believe a vennie default would be easier to deal with than a PDVSA default (In PDVSa there is the chance buitres come in, and derail any restructuring… on the contrary, CACS on Vennie debt allow for a “amicable” restructuring)
    So ladies and gents, this is not 1903.. no battle ship are going to “plant their insolent foot on the sacred land” to seize ports in order to collect debt. Todays world is full of unarmed abogados malucos, and lenthly legal proceedings.
    The best thing that could happen to bondholders, and Venezuela is to sit down, renegotiate debt and go on.. The only way Venezuela can to this negotiations from an “advantage” position is by defaulting. (remember the phrase, if you owe 1 dollar is YOUR problem.. is you owe 1mm US$ is the banks problem).

    • Sorry Roberto I wrote some lines in reponse to your comments and I goofed and they appear above your comment , the thread however is easy to pick up , sorry for the mistake..

  7. Ay Francisco,

    If you are going to take the argentinian rethoric of the vulture-funds to excuse the debts obligations, better try another way.

    Investors put their money where it gets higher profitability, the same as the market only allows the offer-demand rules to be entrophically favourable.

    No one put a gun on the forehead of the government to issue public and PDVSA debt with the ridiculously high interest rate we have been used to in these last 10 years, moreover, the main tenders of public debt are the venezuelan financial industry, so, think about the only way the venezuelan financial system could endure the negative profitability rate in national currency and to continue operating is by accounting and expanding thru the dollar-issued business with the government.

    When the government started to negotiate a debt restructuring it will have to take in count the effect in the national financial system. Will the goverment be willing to face another financial collapse like the one in the 90s with this economic situation of today? Will it help to the getting a way out of the crisis, or will it get this mess worse? My answer is, without a whole restructuring of the system (dollarizing and reducing the State and the economy size) no negociation in that way will help to get us from crisis.

  8. Argentina obtained most of its forex from a multitude of private exports of agricultural products , The Argentine public sector had virtually no important assets abroad . In contrast Pdvsa obtains ( and the country) obtains almost all of its forex from the export of oil and has a great deal of important assets abroad . Argentinas public sector vulnerability to the actions of its creditors is not comparable to the vulnerability of Pdvsa .

  9. Not the lender’s fault. IMO

    Time to look in the Mirror, instead.
    Understanding the roots of what destroys a Democracy.

    Not properly vetting elected officials and wide open, unfettered Universal Suffrage thriving in ignorance and prejudice far from representing the electorate breeds Populism.
    This negative feedback loop creates an indulgent debt-supported welfare state as we can clearly see in Venezuela.
    The government of turn will try to spend as much as possible at the expense of any long term planning. Why should they save money for their counterpart to spend in the future!?
    THIS IS THE EXPECTED AND LOGICAL OUTCOME !

    Never Reform. Never Learn.
    We need more high school drop outs to rule us all and the votes from low information people to enable this madness.

    Unbelievable !

  10. Look, all investors understand that that you can’t get blood out of a stone and that if the golden goose is dead, it doesn’t lay golden eggs. The current bondholders know that the real value of the bonds is far below the face value. The debt holders can be negotiated with. They will accept a haircut and extend the terms. But, they will only do so if they are negotiating with someone in good faith. Today, such negotiations are impossible. That “good faith” does not exist with the current regime.

  11. I wonder if the morality of lending is any different than the morality of any other kind of commercial transaction with the regime or regime controlled entities. Isn’t what Juan is suggesting a boycott? Why should it be limited to lending?

  12. Another interesting moral question, even if hypothetical. An eventual oppo government could repudiate PDVSA/Venezuela’s bond debt on the grounds that it was issued illegally with no scrutiny from the AN, and disappeared into corrupt pockets. With the right signaling–say, a proposed constitutional amendment to forbid honoring those debts–the bonds would crash to less than 10 cents on the dollar in the secondary market. The government could then repurchase the debt and wipe out $68 billion in bonds (+ interest) with less than $7 billion. Is that overkill? Too much punishment for private creditors? At this point, I’m inclined to say no…

  13. Suppose you give a loan to someone who is injudicious in the handling of his money and is unable to pay you back , you learn that by forcibly collecting that money on its due date you are going to cause his family to starve , what is the right thing to do , act to collect all of the money at its due date (the guy had it coming to him) or maybe deferr the payment date on condition that the borrower abides by some conditions that ensure he is more judicious in the handling of his money and ultimately pays the loan back .

    Im told by friends who lived in holland that people there are sometimes so self righteous ( the calvinist streak) that if they see young gir on a bycicle riding on a forbidden space they wont avoid running her over even if they can because she ‘deserved’ being run over for breaking the rules. Evidently being righteous is not always being moral!!

    Have a personal tale about a friend who consulted me on what to do about a man whom he had given a loan to (which he couldnt pay back) , as guarantee to the loan the borrower had sold his lender a piece of land (no strings attached) which value had gone up quite considerably , he said that legally he could retain the land for himself and leave it at that and that he was tempted to do that because his borrower was a bad person and would have done it to him where he in the borrowers situation . I told him that he should do what his conscience told him and need not take his borrowers bad morals as his own , that he was a different person.

    So my friend did what his conscience told him , sold the land , collected his loan and gave over the surplus to his borrower who was humbly grateful (if people in my life had treated me like you treated me I would have become a different more honest person) , the important thing however is that my friend felt very sattisfied with his decision ….. even thanked me for the advise…..

    Lending money or buying bonds is an amoral act , totally impersonal and practical , you dont go into the personal morals of the borrowers , you just want to know whether he will be able to pay it back , if you had to have certificate of good moral behaviour to lend money to or buy a bond from the borrower , that wouldnt be business. Remember business is to a large extent impersonal , as they saying goes when someone hurts someone else from performing a duty , Nothing Personal Just Business…..

  14. “…The folks who enabled this catastrophe? They can wait.”

    Well I guess it was about time for the witch hunt to kick-off.

    8-12 months ago it was: no one is pointing fingers specifically at bond holders, they are “partially” responsible.

    Forward to present time: “Folks who enabled this catastrophe”.

    So, what about the +$500bn-$1tn. which was dilapidated between imports, “raspa cupos” (middle-class included), Derwick Associates, etc. etc.? Bondholders fault too? The people, who siphoned $500bn.+ of assets offshore have nothing to do with this.

    Go ahead and default, you won’t solve the problem because guess what? The problem is not debt. It might be among one of the problems now, but it certainly wasn’t the trigger to the mess. but please do go ahead.

    • Moral aside, it was always a High Yield Investment (also paying very nice dividends to bondholders), no one forced investors to buy High Yield bonds and they knew who were they dealing with (and if they didn’t, shame on them, they shouldn’t be investing in the first place) which is, high risk and higher chances for a default. I’m sorry, oh wait, no, I’m not.

  15. You are completely correct Carlos. No one is asking for understanding, we are all grown ups and understand markets. However, what is incorrect is to use bondholders as scapegoats for all the problems.There will be consequences regardless of all moral judgement, ifs and what not.

    A default is now a political tool and is being used as such.

  16. To paraphrase an old short-sellers’ mantra, “He who borrows what isn’t his’n, must pay it back , or go to prison”. Why is lending money to Venezuela a “moral judgement’ problem–most was lent internationally when oil prices were high, capacity to pay was high, and few predicted a crash in the price of oil–lending was a calculated risk business decision. Now, Venezuela has a problem, in no small part due to gross mis-management/corruption. Original lenders, and even bond re-purchaser speculators, reasonably expect to get their money back, as would any bank lending to an individual, and all legal recourse available to achieve their return of capital is morally justifiable. Those nations/causes wanting virtual/actual handouts, instead of loans, should apply to the IMF, or the Bill/Melinda Gates Foundation.

  17. The other side of the issue which doenst get much attention is the real possibility that we might have a social explosion because of the hardships which paying the external debt is contributing to cause .

    In Jose Vicente’s most recent program he mentions “…existe “una política debidamente planificada”, en caso de que la situación que atraviesa el país pueda provocar “desbordamientos populares”. which implies that the regime is expecting a social explosion ( a second caracazo or worse) and are preparing for it .

    Its not just a question of bondholders having the formally legitimate right to collect on their loans , but of realizing that paying those loans can have cataclysmic implications for a country , they cant just turn their faces and smuggly say ‘that has nothing to do with me’ . Soon enough they will find out that it has a lot to do with them.

    Even though classic studies are out of fashion some may remember Solon the Wise , an historical figure credited to have saved Athens from chaos when the country beingfiercely divided between rich landowning lenders and the mass and their debtors ( the mass of the common people ) ennacted a law pardoning the debts of the latter and by way of example pardoning the loans of his many debtors, so the country could get on with the pursuit of a common life …..he is credited also with setting the foundations of what latter became Athenian democracy . .

    Quite sure the bondholders even if having the right to collect on their debt wont like to be spattered with the blood and offal bursting from a countrys decomposing social order.!!

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