The Only Humanitarian Solution

Francisco Rodríguez (FRod to Venny econ nerds) has taken a lot of flak in recent day. The Torino Capital Chief Economist called for the National Assembly and the National Constituent Assembly to jointly approve any future debt issued by Venezuela — pitching it as a pragmatic solution to an overwhelmingly pressing problem.

More than $3.5 billion in debt comes due in the last quarter of the year, and the government is billions short. It could, technically, sell off a bunch of the gold supposedly sitting in a vault under Carmelitas corner, but it’s made no move to do so, amid speculation that it just can’t find a reputable counterpart. In any case chavismo’s gold holding claims inspire about as much confidence as an Hallaca in July.

Time was when the opposition could posture and say these decisions should be put off until it took power. But MUD’s implosion makes the chances of a transition government remote in the near future — meaning this is either a problem that gets solved with chavismo in power or it doesn’t get solved at all.

We’ve been writing about impending default so long here it’s easy to just dismiss it in a Peter-and-the-Wolf kind of way —and for sure some Venny Traders love to rag on us for it— but at this point, the government is down to throwing Hail Mary passes at Beijing you couldn’t say QIV is looking good.  

For years avoiding default has been the guiding principle of chavista public finance management. For a long time, that made a certain logical sense: default on debt and it becomes hard to participate in international trade at all. For a country as import-dependent as Venezuela, this looked like the very worst case scenario. The “suicidal willingness to pay” has always predicated on the idea that not paying was the real suicide.

MUD’s implosion makes the chances of a transition government remote in the near future.

But the obstacles to continuing to pay keep mounting. Venezuela’s chaotic, chronically-deficitary public finances and its manifest inability to invest the money it borrows wisely is, far and away, the biggest obstacle it faces to raising fresh credit. Lenders look around, see a half-dozen unfinished white elephants from the Tinaco-Anaco railway to the Tocoma Hydroelectric plant, and wonder what fresh boondoggle their dollars are going to get wasted on.

Credit comes from the latin root “credere” —to believe— and the simple reality is that nobody believes in the Maduro regime’s economic stewardship anymore.

But there are second order obstacles to obtaining new loans — U.S. sanctions are one, for sure, but lenders’ weariness of lending without proper legislative authorization is another. FRod’s proposal, as it is, amounts to saying “look, we can’t do anything about the government’s rampant irresponsibility, but we can do something about this legislative authorization problem. Default would be so bad for Venezuela, we might as well do what we can do to ease new borrowing.”

But, under this scenario, who would be the lenders?

U.S. economic sanctions make one thing clear: they can’t be U.S. entities. Given New York’s absolute dominance in international credit markets, that rules out the vast bulk of potential “quality” lenders. But even without U.S. sanctions, the political turmoil and the PR disaster that were the hunger bonds for Goldman Sachs mean that no top shelf international institution would participate.

It’s here that FRod’s proposal stops making sense even in its own terms. The kinds of lenders Venezuela could imaginably seek to raise funds from at this point are not known for their exquisite constitutional sensibilities. We’ll probably end up in a shady deal with some Chinese or Russian bottom-feeder that’ll demand bullet-proof guarantees, probably in a Pawn Store-like repo operation on horrible terms for the Republic.

Default would be so bad for Venezuela, we might as well do what we can do to ease new borrowing.

But we’ve seen deals of that kind happen anyway, with or without legislative approval — pawn shops are not, in general terms, much interested in legalistic niceties. My question for FRod is, who is this mythical entity that would extend Venezuela credit with legislative approval, but would reach for the smelling salts without it? There’s just no overlap in that Venn diagram.

Truth is that it’s two decades of shockingly inept economic management that has made financing under reasonable terms unavailable to Venezuela.

As its strategy’s basic unviability becomes clearer and clearer, the government has been taking the multimillion dollar equivalent of payday loans to avoid default, instead of instituting the reforms absolutely everyone has known are needed for years.

Without those reforms, Venezuela can only obtain credit by accepting terms that would seriously harm it in the long run. Approving credit under such circumstances would only make the National Assembly complicit in a monstrous salvaguarda crime, and for what? To kick the can down the road another three months?

The reality is that Venezuela will never have even minimal economic reform while chavismo stays in power. FRod, who tried to counsel the government in this regard and was rebuffed, should understand this better than anyone. But there aren’t any shortcuts left. We only wish there were.

When your junkie kid asks you for just $20 bucks, it’s painful to say no, because you can see that he’s hungry. But when you know full well those $20 are going straight in his arm, you have to say no. It’s unethical to say yes.

As much as we want things to get better, the only way out of this misery circle is a new government, which is nowhere in sight.

We’re stuck.

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