Guaranteed - 100% artificial

Several years ago, on a bottle which contained a liquid of dubious quality, I saw a promotional phrase displayed with obvious pride which spelled out “Guaranteed 100% Artificial”. I remember having thought of this slogan, which converted a negative argument into a positive one by a total and shameless acceptance of the it’s failings, as a marketing masterpiece.

However, that was many years ago. Since then, our politicians have provided several examples of the application of this marketing strategy, proving that they have taken its development to new heights. This week, I got the impression that I am being taken for a ride again.

Obviously, something must be done about Venezuela’s foreign debt. The point is, why do we have make such a jolly occasion out of a relatively sad affair, something like joining a funeral procession in New Orleans.

There has been much ado about the development of a new strategy for the management of this debt. Among the incredible advantages we have achieved, through the efforts of our financial magicians, the following have been readily bandied about:

“Above all, the country would manage to establish a yield curve similar to those in other countries which would allow for future issues of debt instruments....”. Splendid! Imagine, we would now have our very own yield curve! Just what the doctor ordered for Venezuela at this moment! There is no doubt in my mind that this would pave the way for new, and possibly indiscriminate, indebtedness.

“In addition, Venezuela would attain savings due to the elimination of the requirement for collateral as is the case for the Brady bonds already issued...”. Part of the external debt was guaranteed by low yielding bonds which in one way or another reduced the country’s net indebtedness. Once these collateral bonds are released, the government is free to use the funds for other “productive” expenses. This means that our national debt will be increased, bringing our net indebtedness up to the level of our gross indebtedness.

The new bond issue, which if successful could top US$ 1 billion, would carry an estimated spread over the US Treasury Bill rate of “only” 3.5%. The former is today approximately 6.5%, which bring the total annual rate to about 10%. This should technically be marvelous for a country “which has in the past had to issue Brady Bonds which carried interest rates with spreads of up to 6.5% over the US Treasury Bill rates”. I’m not about to discuss the cost to the Nation of previous issues. May those responsible for these transactions defend themselves. One thing is a 6.5% spread (if this is indeed the case, which I doubt) established for instruments with relatively short maturities. Another, totally different, is tying into a 3.5% spread over a whopping 30-year period. The favorite tool used to calculate the “savings” for the Nation is based on analysis of the present value of money, i.e. the value of a dollar today versus the value of a dollar tomorrow. Beware, these are the very same tools that were used to argue Venezuela into the current debt crisis in the first place.

A simple initial calculation would indicate that Venezuela would undertake interest payments over a 30 year period of US$ 1.085 billion in excess of what the United States would pay for a similar US$ 1 billion issue. If we were to extend this calculation to include the cost of accumulated interest at the full 10% per annum, the value of this interest payment differential would explode to US$ 6.368 billion. 

Politicians used to blame international bankers for our high levels of debt. One President even stated that he had been mislead by them. Today international banks are the men in the white hats. On the other hand, bank analysts consider Venezuela worthless one day and worth billions for 30 years the next. Seems like nobody can make up his mind.

We have been told that another advantage of this new financial strategy is that the country’s debt profile will be changed. The new 30-year bond issue will give future budgets some “breathing room”. This means the pressure to reduce government spending and streamline its bureaucracy will have been effectively trashed. I can almost hear the following dialogue in the back rooms of several ministries: “Well boys, enough of the critiques of our sons who lament not being able to go to Disney World or to a University abroad like we did because we have misspent our oil income and, on top of it all, have increased the country’s indebtedness. Let’s change the signals! We’ll postpone the payment of our external debt and lay it square on the backs of our grandchildren. You know what they say, “if it’s the same we are not cheating” (“lo que es igual no es trampa”).

Finally, I wish to make my own contribution, however small and humble, to the science of successful marketing of dubious results. The next time there is a general strike in Venezuela, I suggest the headlines should read: “Bravo! This strike is a healthy indication of social and economic development in Venezuela”. We all know that only well-developed countries such as France, England and the United States can afford a nation-wide strike.