Venezuelan Default Suggested by Harvard Economist

Venezuelan Default Suggested by Harvard Economist
By Sebastian Boyd  Sep 8, 2014

Sept. 8 (Bloomberg) -- As Venezuela racks up billions of dollars of arrears with importers that are fueling the worst shortages on record, one of the nation’s top economists is questioning the government’s decision to keep servicing its foreign bonds. Katia Porzecanski has more on "Bottom Line." (Source: Bloomberg)
As Venezuela racks up billions of dollars of arrears with importers that are fueling the worst shortages on record, one of the nation’s top economists is questioning the government’s decision to keep servicing its foreign bonds.
A “massive default on the country’s import chain” is part of what has allowed the nation to keep paying its foreign bonds, Ricardo Hausmann, a former Venezuelan planning minister who is now director of the Center for International Development at Harvard University in Cambridge, Massachusetts, said by phone from Boston. “I find the moral choice odd. Normally governments declare that they have an inability to pay way before this point.”
While Hausmann declined to say if he’s specifically recommending a default, he said he found “no moral grounds” for the government and state-owned oil company Petroleos de Venezuela SA to make $5.3 billion of bond payments due in October. With foreign reserves at an 11-year low and arrears to importers growing, Venezuelans are struggling to find everything from basic medicines to toilet paper. And prices are surging on the goods that they can buy, saddling the country with the world’s highest inflation rate.
The nation’s bonds are sinking as President Nicolas Maduro fails to stem the crisis, extending declines today. The extra yield investors demand to own Venezuelan sovereign bonds instead of Treasuries jumped 2.99 percentage points in the past month to 13.39 percentage points at 3:12 p.m. in New York, the highest since February, according to data compiled by JPMorgan Chase & Co. The spread is the highest in emerging markets.

Ramirez Departure
Bonds slumped last week after Maduro removed Rafael Ramirez, the country’s main economic policy maker, fueling concern the government may delay or scrap measures to ease the hemorrhaging of dollars, including a currency devaluation and increase in gasoline prices.
Marcos Torres, the head of economy and finance at the central bank, didn’t reply to an e-mail seeking comment on Hausmann’s statements. An official at the Information Ministry declined to comment when reached over the weekend.
Hausmann has been a public figure in Venezuela for more than two decades, having served as planning minister in the government that the late Hugo Chavez, Maduro’s predecessor and mentor, tried to topple in a 1992 coup attempt. Hausmann then joined the Inter-American Development Bank, where he was chief economist, before leaving for Harvard in 2000.
In a Sept. 5 piece published in Project Syndicate that was titled “Should Venezuela Default?”, Hausmann and Miguel Angel Santos, a Harvard research fellow, highlighted how the import arrears and shortages are imposing hardship on Venezuelans.
“The fact that his administration has chosen to default on 30 million Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude,” they wrote. “It is a signal of its moral bankruptcy.”
Francisco Rodriguez, an economist at Bank of America Corp., said that defaulting now would be a mistake. Distortions created by the government’s price and foreign-exchange controls, rather than a lack of hard-currency, are causing the shortages, he said.
“Venezuela has more than enough foreign currency earnings to both ensure an adequate supply of imports and meet its foreign obligations,” Rodriguez said in a Sept. 5 note to clients. “Current scarcity levels are caused not by the need to service on the country’s external debt but by the massive distortions to relative prices that have resulted from the country’s tight price and exchange controls. Resolving these relative price distortions, rather than defaulting, is the key to restoring Venezuela’s macroeconomic health.”

Subsidized Food
The rout in Venezuela’s bonds this year stands in contrast to the returns they generated during Chavez’s tenure. While the currency and price controls, along with state takeovers of companies, caused investor concern, soaring oil prices allowed the government to keep serving its debt. Venezuelan bonds returned 677 percent from his inauguration in 1999 until he died in March 2013, beating the 387 percent average gain for emerging-market debt during that span, according to data from JPMorgan.
One of the problems the government could face in defaulting is that bondholders may seek to seize the assets of Citgo Petroleum Corp., the U.S. refining and distribution arm of Petroleos de Venezuela, to recoup their money.
Petroleos de Venezuela has said that it’s looking to sell Citgo for at least $10 billion. Even that amount wouldn’t cover arrears to importers that Morgan Stanley estimated in June may be as much as $13 billion, a figure that equals more than half the country’s foreign reserves.

Inflation Data
Venezuela has delayed regular reporting of economic statistics and has yet to publish inflation data for June, July or August after annual consumer-price increases reached 61 percent in May. That was the highest among all economies tracked by Bloomberg.
The increasing difficulty of finding dollars is forcing Venezuelans to the government’s official distribution depots, where they line up for subsidized goods with numbered tickets that give them the right to buy items including frozen chicken, rice and cooking oil. Protests sparked in part by the shortages have led to 43 deaths this year.
It’s “a completely unsustainable situation,” Hausmann said in the telephone interview.

Credit-Default Swaps
Venezuela’s foreign-currency debt is the most expensive in the world to insure against default with credit-default swaps after similar securities for Argentina stopped trading when it couldn’t make a payment due July 30. Venezuela’s CDS have surged 3.73 percentage points in the past month to 14.47 percentage points. That implies a 63 percent chance of a disruption in payments in the next five years, according to data compiled by Bloomberg.
Venezuela’s $4 billion of notes maturing in 2027 dropped 3.53 cent to 70.13 cents on the dollar at 12 p.m. in New York.
When asked what he would do if he were in Maduro’s position, Hausmann’s answer illustrated both his lack of confidence in the government as well as the magnitude of the challenge facing the country.
“I would immediately resign and call democratic elections,” he said.

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Lester Pimentel, David Papadopoulos