Is Venezuela on the Verge of Default?

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Venezuela Threatens Harvard Professor for Default Comment

I will trust more Ricardo Hausmann than Nicolas Maduro - vdebate reporter

Maduro threatens Harvard Professor for default comment
By Jose Orozco and Sebastian Boyd
Venezuelan President Nicolas Maduro instructed the attorney general and public prosecutor to take “actions” against Harvard Professor Ricardo Hausmann, saying the economist sought to destabilize the country by suggesting the government default on its debt.
Maduro lashed out at Hausmann during a televised address last night, calling him a “financial hitman” and “outlaw” who forms part of a campaign “that has been initiated around the world against Venezuela.” He didn’t specify what actions he had asked the attorney general and prosecutor to take.
Venezuelan bonds tumbled earlier this week after Hausmann co-wrote an opinion piece on Sept. 5 with a Harvard colleague arguing the country should consider defaulting because it had already racked up billions of dollars of arrears with importers. Widespread shortages of everything from toilet paper to medicine have helped fuel the world’s fastest inflation.
Maduro’s speech was “the despotic diatribe of a tropical thug,” Hausmann said by phone today. “This is Exhibit A in how Venezuela is not a democracy. He uses his position as head of state to intimidate people who think differently.”
The president’s office, the attorney general and the information ministry didn’t immediately reply to e-mails seeking comment on what actions were planned against Hausmann. Born in Venezuela, the professor served as planning minister in the 1990s under the president that Maduro’s mentor and predecessor, the late Hugo Chavez, tried to topple in a coup attempt. He has lived in the U.S. since 1994.

Previous Crackdowns
Maduro and Chavez have jailed opponents in the past. National Guard troops arrested opposition leader Leopoldo Lopez in February following protests that left five people dead, accusing him of inciting violence. Former Defense Minister Raul Baduel, who served as a paratrooper with Chavez before being jailed after breaking with the government, is among a group of political opponents serving an eight-year sentence.
In the interview today, Hausmann reiterated his comments from the Project Syndiate opinion piece that Venezuela has already defaulted on importers and suppliers while noting that the country’s constitution guarantees freedom of speech.
“The question is not will Venezuela default or not,” he said today. “Venezuela already has defaulted. The question is who gets paid. Venezuela is only paying Wall Street."
The country’s benchmark bonds due 2027 sank 3.6 cents to 70.08 on the dollar on Sept. 8, driving their yield up to a six-month high of 14.4 percent, as Hausmann’s comments added to investor concern about a nation that saw its foreign reserves sink to an 11-year low last month.

Bonds Recover
Venezuela’s debt has rebounded the past four sessions, with the benchmark securities climbing above 74 cents as of 9:32 a.m. in New York, as Maduro sought to reassure creditors. On Sept. 10, he told a television audience that the government would meet its “international obligations completely, down to the last dollar.”
While the bonds are rebounding, they remain the most expensive sovereign debt to insure against default in the world, according to data compiled by Bloomberg. Investors pay 14.33 percent annually for protection against non-payment over five years, a rate that implies a greater than 60 percent chance of default during that period.
In his speech last night, Maduro made reference to Hausmann’s role in the government of then-President Carlos Andres Perez. It was Perez’s fiscal austerity and free-market measures that triggered rioting and street protests and led to the coup attempt in February 1992 that made Chavez a public figure in Venezuela. Hausmann was appointed minister in a reshuffle after the coup.

Economic Damage
“You’re the top adviser, Ricardo Hausmann, of all these groups that want to inflict economic damage” on Venezuela, Maduro said. “Of course, because you live in your mansions over there” in the U.S., he said.
Hausmann denied receiving payment for his comments or having links with investors interested in driving down Venezuelan bonds.
Maduro’s threats are “evidence of an outlaw government, a rogue state,” Hausmann said.
Hausmann was the first chief economist of the Inter-American Development Bank. While there he and Barry Eichengreen developed the concept of “original sin” to describe how emerging-market borrowers with weak domestic capital markets are forced to borrow in hard currency. The currency depreciation then makes it harder for them to pay debt back should they run into trouble. Eichengreen teaches at the University of California at Berkeley.
Hausmann discloses his consultancy work on Harvard’s website. Last year he spoke at conferences organized by Banco Bilbao Vizcaya Argentaria SA, JPMorgan Chase & Co. and UBS AG.
To contact the reporters on this story: Jose Orozco in Caracas at jorozco8@bloomberg.net; Sebastian Boyd in Santiago at sboyd9@bloomberg.netTo contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net Brendan Walsh

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

Venezuela: a minefield

Venezuela: a minefield

[02-13-11] The New Year has found Venezuela rife with problems. Complaints, exasperation and overall inconformity with how things stand have become compounded by unsatisfied expectations. Not a single area in the life of the country has been spared. Productivity is at its lowest and unemployment at its highest. The economy as a whole, but in particular the agriculture and industry sectors, as well as social services such as health and education, judicial services and personal safety, housing and transportation, are all in crisis due to current government policies.

Workers and Trade Unions, including those sympathetic to the government, are demanding respect for unfulfilled labor agreements. The oil industry, unable to cope with the government’s many demands, has resorted to increase its debt and to future sales contracts at prices well below the market. Electricity is rationed. During the dry season there is no water, and during the rainy season, when there is water in excess, there is no way to mitigate its damages. The hailed increased gas production never materialized and Venezuela has even had to import. Non-traditional exports have declined alarmingly and dependence on imports increased exponentially. In 2010, for the second time in a row, Venezuela’s BOP closes with a deficit above US$ 10 billion.

With risky brinkmanship tactics, the ‘revolution’ seems to be purposefully creating an atmosphere of anarchy in selected sectors of economic and social development. Not even culture has been spared. In a situation reminiscent of a "Maoist cultural revolution" of sorts, a revolutionary dogma has been imposed on the cultural establishment. Museums are accused of being "elitist spaces" and the national heritage they safeguarded left unattended, dispersed, or lost. In early 2011, the internationally-recognized ‘Jacobo Borges’ and ‘Alejandro Otero’ Museums were turned into shelters for the homeless since the homeless and displaced, in the words of the Minister of Culture, are in and by themselves "a work of art".

The government’s total incompetence during the twelve years it has held absolute power is clearly revealed by the inexplicable and unacceptable housing deficit, which now serves the President for his absolutely unconstitutional seizures of private property. After twelve years of smoke and mirrors, housing has now become the focus of the government’s concern, in a belated attempt to amend its negligence in this sector, as in many others. Housing developments plans in urban and rural areas were abandoned as a whole. The systematic, unjustifiable and at times violent expropriation of productive land, homes and businesses has left Venezuela paralyzed and bewildered.

Although the opposition’s current participation in the National Assembly has brought some fresh air into politics, efforts are however made by the government to restrict the exercise of the parliament’s oversight responsibilities and keep the "circus" going on. Universities has been systematically sabotaged by budgets cuts, while the appointment of a new Minister of Higher Education – who although a career educator is totally committed to the leader of the revolution’s designs like the rest of her predecessors - intends to mitigate the government’s previous mishaps in trying to reduce or eliminate the universities independence.

Time bombs are ticking all over Venezuela and the outlook for 2011 is not flattering. A forecasted 38% rate of inflation, among the highest in the world, will seriously further reduce Venezuelans’ purchasing power. The basic “Food Basket” is officially estimated at Bs. 3,600, while the “Basic Basket”, which includes other than food basics, at Bs 8,000, with annual increases of 30% and 43%. Unemployment is expected to be greater than 14%.

Over and above the unpromising omens that the current government's mismanagement announces for this year, the lack of civility in the country and among its citizens is particularly disturbing. Anxiety, restlessness and unease among Venezuelans have become pervasive. Violence, linked to un-satisfied daily basic needs, reduced purchasing power and unemployment, creates an implosive environment. Fortunately, polls show that Venezuelans’ most important wish is still to enjoy peace and unity through tolerance and respect.

Venezuela's Monetary Mayhem

Venezuela's Monetary Mayhem

Fiat currencies plus bad government equal trouble.

Greece is bankrupt. But since it is a member of the euro-zone and can't print money, its richer European neighbors have agreed to bail out its creditors. In return, Greece is supposed to clean up its fiscal and regulatory act. This is why public-sector unions have been wilding in the streets and even firebombed a bank.

Beware of Greeks burning thrifts. They are not unlike the militants who violently protested in Argentina in 2001 when that government hit the fiscal wall. Argentina also had a hyper-regulated economy, a government addicted to spending, and a monetary regime that made it impossible simply to print money to pay its bills. At bottom Argentina's rioting mobs wanted the same thing that their Greek cousins want now: a return to a national currency that can be fabricated on demand.

Critics of the euro seem to think the Greek tragedy vindicates their view that each country should have its own currency and monetary policy. But that wouldn't solve a thing. Let's face it: If Greece weren't today's Argentina, it would be Venezuela. In that country, which has sovereign money—the bolivar—and no monetary rule to prohibit the central bank from financing the government, inflation is now spinning out of control.

In their 2009 defense of economic liberalism titled "Money, Markets and Sovereignty," Benn Steil, of the Council on Foreign Relations, and Manuel Hinds, former finance minister of El Salvador, provide a brief history of the rise of fiat currencies. "The modern mind," they explain, is used to "seeing money as a creation of states." Yet the powerful did not launch the idea some 2,500 years ago "to promote economic activity, but to profit from it," they note. "And today the imposition of national monies remains one of the most potent tools available to governments to extract wealth from their populations and to exercise political control over them."

Argentina crafted its "convertibility law," which required pesos to be backed up by dollar reserves, precisely to confront this problem. But the politicians weren't about to downsize their role, in spending or in regulation, and eventually too much debt led to bankruptcy. In 2002, the government pulled the plug on peso convertibility. Eight years later the so-called floating Argentine peso is a disaster. The country remains mired in economic mediocrity and double-digit inflation, and is held hostage by an illiberal government.

Anchoring the currency to the dollar and thus outsourcing monetary policy to the U.S. Federal Reserve had been a success, but special interests and politicians could not bear that it robbed them of power. Venezuela is another place where the politicians see no reason why the state's appetite for grabbing private-sector wealth should be constrained. Maintaining price stability ought to be a no-brainer because the government has oil revenues earned in dollars to back up the local currency. But the bolivar is now in free fall.

Hugo Chávez

In January, strongman Hugo Chávez announced that he would devalue the bolivar to 4.30-to-the-dollar (except for essentials) from 2.15. He assured Venezuelans that the government would be able to provide all the dollars needed to run the economy at the weaker bolivar level and that the black-market rate, which was six to one, would converge with the official rate.

But the private-sector was not convinced, and the black-market rate for dollars went even higher, pushing prices of imports up sharply. Nine days ago the cost of the dollar soared above eight, signaling a vicious inflationary spiral.

The source of this monetary mess is the state's hunger for power. Whereas Castro used terror to make himself dictator of Cuba, Mr. Chávez has used the state's control of oil revenues and the central bank to purchase his dictatorship. It's no secret that his popularity, despite the deterioration in Venezuelan living standards, comes from printing and spreading bolivars around low-income barrios as well as among nouveau-riche business elites and the military.

With too many bolivars chasing too few goods, Mr. Chávez is now blaming "speculators." Recently he arrested 47 butchers for evading his price controls. The Congress he controls has also proposed legislation to criminalize trading in the parallel market for dollars. Yet beyond terrorizing the nation, the crackdown is unlikely to improve things because the market needs dollars to function. "The collapse of the economy is very near," one Venezuelan wrote to me on Saturday.

The lesson here is that without political will, fiat money in any form—be it in a monetary union, anchored to a reserve currency or run by the sovereign—is unreliable. As Messrs. Steil and Hinds note, "money untethered to a commodity gives rise to inflation when managed by corrupt, irresponsible or incompetent rulers," thereby covering Greece, Argentina and Venezuela in one breath.

Harkening back to the wisdom of a 15th century Spanish canon lawyer, the authors capture today's fiat currency problem: "The ruler's power to create value from the valueless by designating it 'money' was bound to lead to inflation."

Write to O'Grady@wsj.com

Venezuela is Crumbling

Really? It has been crumbling for a while.

Venezuela is Crumbling
Economic misery in Hugo’s populist paradise.
BY Jaime Daremblum
May 14, 2010 12:00 AM

Recent weeks have brought more depressing economic news from Venezuela, where populist leader Hugo Chávez seems intent on destroying not only democracy but also the last remaining vestiges of private enterprise.

On April 21, the Latin Business Chronicle predicted that Venezuela would post the world’s highest inflation rate in 2010, ahead of even the war-torn Democratic Republic of Congo.

On May 5, the United Nations Economic Commission for Latin America and the Caribbean reported that foreign direct investment (FDI) in Venezuela dropped from $349 million in 2008 to negative $3.1 billion last year, “mainly as a result of nationalizations.” In other words, the Bolivarian Republic experienced a net FDI outflow of $3.1 billion in 2009.

On May 7, the Venezuelan central bank released data showing that consumer prices rose by 5.2 percent from March to April. As Bloomberg News noted, this represented the largest monthly increase since 2003. Meanwhile, the annual inflation rate hit nearly 32 percent.

On May 11, the Chávez-controlled National Assembly introduced legislation designed to clamp down on currency trading and strengthen the bolívar, Venezuela’s national monetary unit. “This is a very negative measure for the Venezuelan economy,” Barclays Capital economist Alejandro Grisanti told Dow Jones. “It will increase the pressure on prices and will deepen the contraction of the economy.” In January, Chávez devalued the bolívar in order to facilitate greater social spending. Since then, the currency has plummeted, making Venezuela’s already dire inflation problem even worse.

Global credit crunch batters Venezuela

Global credit crunch batters Venezuela
Overnight lending rate climbs as high as 90% after central bank suspends open market operations

By Polya Lesova, MarketWatch
Last Update: 2:28 PM ET Sep 6, 2007

NEW YORK (MarketWatch) -- In a fresh example of how the global credit crunch is hitting emerging markets, Venezuela's overnight lending rate climbed to as high as 90% Thursday after the central bank said it has suspended open market operations meant for pumping liquidity into the market.

The average overnight rate had been at an average of 22% on Wednesday. Venezuela's central bank said it has suspended open market operations, but added it would maintain credit assistance operations, according to a statement published on its Web site Wednesday.

"The squeeze in the Venezuelan money market is yet another example that the global credit crunch is becoming visible in emerging markets, especially in the most imbalanced economies and in countries with a weak financial architecture like Venezuela," said Lars Christensen, senior analyst at Denmark's Danske Bank.
"This story is not an isolated Venezuela story, but rather a developing trend," he said, adding that money markets in both developed and emerging markets aren't functioning well at the moment.

"While the developed economies in general have a strong banking sector, this cannot be said for many emerging markets, and hence the risk of banking and financial distress is much larger in emerging markets than, for example, in euroland and the U.S.," Christensen said.

Deepening trouble in the U.S. subprime-mortgage market has spilled over into global credit and equity markets, causing turmoil and prompting some investors to slash their exposure to risky assets, including those in emerging markets. See Emerging Markets Report.

Russia is another example of an emerging market that's suffering from the global credit crunch, Christensen said. "There's no or very little liquidity in the market. That has led smaller banks to halt their lending activity."
In Latin America, imbalanced economies such as Venezuela and Argentina are the most vulnerable, while Brazil looks much healthier, he said.

More trouble ahead for Venezuela

Venezuela, a founding member of the Organization of Petroleum Exporting Countries, was the world's eighth-largest oil exporter in 2005. The huge oil revenues have fueled the country's rapid economic growth.

Venezuelan President Hugo Chavez, a vocal critic of the U.S., has pledged to nationalize assets in important industries such as electricity, oil and mining. Chavez has consolidated his power over the country, controlling Congress, the judiciary and the army.

"The squeeze in the Venezuelan money market also has to be seen in the light of investors reducing exposure to high-risk markets," Christensen said. "Despite increasing political and economic problems in Venezuela, money has been pouring into the Venezuelan markets. This might very well be coming to an end."

Christensen said he has a bearish view of the Venezuelan economy and markets for several reasons, including Chavez's authoritarian regime, reckless and pro-cyclical fiscal policies, very high inflationary pressures and a rapidly shrinking current account surplus.

Polya Lesova is a MarketWatch reporter based in New York.

There is no hiding the obvious

It is nothing new for the Chávez administration to attack and try to discredit nongovernment organizations. It knows that these spokesmen of civil society are independent and do not lend themselves to manipulation, particularly those that work to defend human rights.

In order to discredit these representatives of civil society and prevent them from taking action, they have resorted to every trick in the book, including arbitrary and unconstitutional interpretations of the law.

One such was the decision handed down by the Supreme Tribunal of Justice in 2000 in which Justice Jesús Eduardo Cabrera Infante determined that organizations that received financing from abroad did not form part of civil society. The purpose behind this decision was to restrict the participation of civil society in any sphere of national life. What is more, during these past seven years, this same decision has been used at the discretion of the powers that be and when it suits them to silence complaints about what is happening in Venezuela raised by different NGOs that work to defend citizens’ rights.

The NGO to come under attack today is Transparencia Venezuela, the Venezuelan chapter of Transparency International, a nonprofit organization of renown that seeks to prevent and reduce corruption in all parts of the world. Transparencia Venezuela had planned to submit a follow-up report to the OAS this week on compliance with the Inter-American Convention against Corruption (IACAC), under which it represents Venezuelan society.

At that meeting, at which the Venezuelan government would also be represented, the countries (government and civil society) are under the obligation to submit their respective reports on progress made in the fight against corruption.

However, the Venezuelan government, availing itself of the infamous decision of the TSJ mentioned earlier, is, once again, trying to prevent Transparencia Venezuela from submitting its report on corruption in the country. It fears, and quite rightly so, that the rampant corruption that is undermining the Bolivarian government will be exposed, yet again, for the world to see.

So, in a letter from Venezuela’s official representatives, signed by the General Accountability Office of the Republic and addressed to the Follow-up Mechanism of the Inter-American Convention against Corruption (AICAC) follow-up mechanism, they claim that Transparencia Venezuela is not an organization of Venezuelan civil society because it receives funds from abroad.

The Head of the Accountability Office even chose to forget the fact that the AICAC follow-up mechanism had earlier recommended that this decision be eliminated, while requesting that steps be taken to ensure that there were no provisions in current legislation that restricted the participation of civil organizations in efforts to prevent corruption.

It may well be that the government will, once again, manage to prevent Transparencia Venezuela from submitting its report, thus violating the NGO’s right to take part in the AICAC follow-up mechanism and setting a worrisome precedent so that, in the future, the government and government agencies will have the power to select who may and who may not monitor them.

With all that, the Chávez administration will not be able to prevent the AICAC follow-up mechanism from receiving the different reports from Transparencia Venezuela or the findings from being made public.

In other words, however hard it tries, the government will not be able to hide the obvious, particularly the widespread corruption plaguing its revolution.

www.veneconomia.org.ve