A code for our ‘public servants’

I have in my hands a copy of the Official Gazette of the 15th of July 1998. Published in this gazette and entitled “Instructivo No. 1”, we can find the Code of Conduct for Public Servants. I have this document because someone threw it into my lap a few days ago and asked me what I thought of it. I have been at a loss for words since then. Maybe I am at a loss for words because this is one of those circumstances in which keeping quiet is exactly what is called for when having noble sentiments or simply a good code of conduct.

On Father’s Day, when my daughters come up with presents of gigantic multicolored key rings with looks on their faces that say “use it or you don’t love me”, I don’t merely hide my reservations but even am able to produce evidence of infinite enthusiasm. 

When a friend who has recently discovered his hidden talent for painting shows me his first works, I also hide my reservations with words such as “how interesting”, albeit distorted just a wee bit by a mild cough. 

When a person I don’t know commits the type of faux pas that most of us commit at one time or another, I also hide my reservations with total silence. If such a silence simply aggravates the embarrassment of that person I even, educated as I am, tend to create some diversion to ease the pain.

No way am I going to hold my tongue on this one! This “Code of Conduct” was signed, based on a 40-year-old Constitution, by an outgoing President and 23 Ministers, professionals, neighbors and of age. I don’t see why I have to hide my reservations.

I am not saying that it is wrong to require that a Public Servant be “honest, fair, polite, loyal, disciplined, efficient, responsible, punctual, transparent and clean and that he have a calling to serve”. 

As standards, these are so logical that they should be required even to simply aspire to a post as Public Servant.

I am also not saying it is wrong to try to define each and every one of these traits, even though I think the place and time to do this is during primary school.

What I am saying, however, is that it is a bit disquieting to see the publication of a ‘manual’ like this one in a formal vehicle such as the Official Gazette. Specially when the fact that we are going through a moment of such emotional import as is the transition to a new millenium while facing one of Venezuela’s worst crises, both structural and temporary, should merit a ‘real’ effort to push the country towards a new path or model of development.

It is disquieting because it reflects the traditional attitude of our governments that think that all our ills are a result of human frailties and cultural faults that can simply be rectified by decree.

Disquieting because it reflects the degree of shamelessness that our governments have achieved. They have thrown the first stone and preach of truth, trying thereby to tell us that those in the driver’s seat have been, are, and always will be, over and above the flagrant violations of each and every article in the new code.

It must be due to all of this that it is so difficult to remain silently discreet. For example, should the government simply have offered its excuses for the difficult market conditions in which the Brady Bond swap was executed and the recent dollar issue of 20 year bonds at 14% was floated instead of sandbagging us by selling both as great achievements, the adverse reactions would have been minimized. Luckily, this will not happen again. Paragraph (a) of Article 26 of the Norms states that “Every person is entitled to know the truth. The Public Servant must not omit or falsify .........”.

All publications in the Official Gazette are subject to occasional typographical errors. Unfortunately this must be the case in Article 17:1 in which we read: “Those persons who have occupied public office must not use information obtained during this time against the interests of the Republic for at least one year”. The statute of limitations of the prohibition to use anything at all as a tool to attack the best interests of the Nation should definitely not prescribe!

The Code frequently repeats that its contents must be made public (could this actually acquire the status of Mao’s Little Red Book?); calls for the creation of a National Board of Public Ethics; and allows Public Offices to issue complementary norms as long as these are kept “within the framework of the spirit of the Code”. We evidently have not heard the last word.

As an incentive, the Code specifies in one of its articles that the Public Servants must comply with the former in order to be eligible for “condecorations awarded on the Day of the Public Servant”. Unfortunately, the Code does not include one article, one paragraph, one letter, nor one comma with regards to what would happen should a public official not comply with the letter of the decree. This evidently renders the entire effort less credible and efficient.

However, all is not lost. This Code, published in a leather hardcover and placed in the drawers of the night tables of local hotels, could indeed become a precious souvenir for foreign tourists. Additionally, Paragraph (c) of Article 19 states that the “Public should be treated with the formal “Usted” and familiarities should be avoided ....”. 

Could we finally be close to getting rid of the familiar “mi amor” and “mi vida”?

 

A way to assess the bond swap

The calculation of present value is a valuable tool of analysis in today's financial world. When managed by rookies or people with wrong intentions it can be very dangerous, as all tools are. This is good to keep in mind when issuing judgment on Venezuela's 1997 Brady Bond swap. The concept of present value can be clearly illustrated by using the classic example of inheritance. In this example, someone asks a grandchild for the amount he is willing to trade today for a future inheritance of $1 million, which will be willed him by his grandmother. The answer to this question will be a function of three factors.

The first factor involved is time. If the grandchild considers that the grandmother is still healthy and that she therefore may live for quite a few more years (say 20 years), then he will obviously be willing to apply a greater discount and accept a lower present value. On the other hand, should the grandmother be rather ill, and death apparently just around the corner, then this discount will be smaller and the amount of the inheritance will be greater.

The second relevant factor is risk. This is based on the philosophy that it is better to have one bird in hand than a hundred in the bush. Should the grandchild think that his grandmother may actually change her mind and leave him penniless, he will again be willing to apply a greater discount and therefore accept a lower value today.

The third factor that must be mentioned is opportunity cost - in other words, the alternative use that maybe made of the funds. If the grandchild urgently needs the funds to pay off a gambling debt before someone breaks his kneecaps, it is obvious that he gill accept a greater discount and again accept a lower sum as present value of his inheritance . If, on the contrary, he expects to invest the funds in long term 30-year United States Treasury bonds, the discount he will offer will not defer too drastically from the yield produced by these instruments.

The risk factor and the opportunity cost factor come together in what we know as the discount rate. The mathematical process whereby present values are calculated consists in discounting (at the discount rate) the amount being analyzed (the inheritance) over an established period (time).

At this point, we have only come to the conclusion that even when we hide this calculation under the mantle of sophisticated financial techniques, there is a fundamental logic to the same. The value of something in the future is lower than it is today.

Having herewith complied with the initial objective of this article – to transmit as concisely as possible the concept of present value - let's now examine how this can be abused. The recent case of the Brady Bond swap was based on the analysis of supposed benefits found in two arguments: first, the fact that financial experts loudly praised the operation; and second, the analysis of the present value of the operation.

As far as the source of the praise, I do not wish to go into detail. But initially it seems that $28 million in commissions plus information of great income generating potential should be enough to justify the creation of a good Swap Fan Club.

As a result of the swap, Venezuela obtained $1.3 billion. The present value of this evidently is the same $1 .3 billion. In exchange, Venezuela had to undertake additional payments. These payments are: additional annual interest of $70 million over-- a 23-year period until 2020 as well as $370 million to be paid for seven years between the years 2021 and 2027. A final payment of $4 billion is due in the year 2027.

The classification of this operation as "financially sound" depends on whether or not the present value of the additional payments described in the previous paragraph is lower than the $1 .3 billion received initially. It all depends on the infamous discount rate applied. With a discount rate of 8.8 percent, the operation is neutral (Blah Matos). With a higher rate, the operation could be rated as marvelous (Viva Matos!). Finally, with a lower discount rate, the operation is an unmitigated disaster (Down with Matos!).

We will not issue opinions about who is right. I would like though to alert readers about the vicious circle caused by the erroneous use of the present value principle which, in the hands of the wrong people (politicians maybe?) could generate catastrophic results.

Because it has implemented shortsighted policies, Venezuela has problems of high indebtedness. When the country runs into problems, the discount rate applied by international markets is normally increased. When the rate is increased the value of the present value of future payments is reduced. When the value of the future payments is reduced, additional indebtedness is stimulated. And the vicious circle continues to turn!

The Brady Bond swap made simple

An intense debate has been unleashed about the government’s recently executed bond swap operation. As far as the financial implications of this swap are concerned, we note that many renown financial analysts are producing studies thereof, some showing positive results while others are negative. There is great confusion all around.

A few weeks ago, before the storm, I expressed certain reserves about the operation. Above all that results of the swap definitely were not as positive as those the authorities were promoting to validate the deal. I will try to present a simple analysis which I hope will shed light on the operation and allow readers to come to their own qualified conclusions.

In order to limit the analysis to strictly financial matters, it is necessary to clarify and to eliminate the noise created by some initial aspects that may cloud the issues. The first refers to the question of legality of the operation and the second to whether corruption was present.

As far as the legal issue is concerned, I should, not being a lawyer, refrain from taking positions. However, since one of the key inputs to a legal study would be whether or not the country has taken on new debt, I find it difficult to understand how Venezuela all of a sudden ends up with an additional US$ 1.317 billion in its kitty without net indebtedness. The only possible alternatives are either that the Nation has won a gigantic Lotto or, God forbid, has been involved in some type of misappropriation in the international markets. Anyhow, it is apparent that it is frequently more important to comply with one’s duty formally than realistically. In this sense, the bond swap could be totally “legal”.

With respect to the issue of corruption, only solid police investigation could reach a serious conclusion. Obviously, any such investigation should take into consideration not only the swap itself, but also any operation that took place prior to its execution and through which people in the know could have taken undue advantage. Since I am neither an investigator nor a policeman, it is impossible to issue a factual opinion. It is also irrelevant, since corruption may be present both in excellent financial operations as well as in the bad ones.

Having eliminated the aspects of legality and corruption we can proceed to the financial issues. This analysis is, in truth, extremely simple. By the way, in our analysis we have avoided all discussion as to whether the effects of the swap should be measured from the perspective of the Ministry of Finance or that of the Central Bank. For the common citizen, both form part of the same Venezuela.

Before the swap operation, Venezuela had an obligation on paper of US$ 4.441 billion. Interest incurred annually up to the year 2020 was to have been in the order of US$ 300 million. The debt was guaranteed by collateral that produced its own return which in turn, by the year 2020, should have been sufficient to amortize the principal of the debt.

After the swap operation, which in essence canceled the beforementioned debt, the collateral originally held was returned to Venezuela. This collateral, in the form of Zero Cupon US Treasury Bonds with a current value of approximately US$ 1.371 billion, has already or will obviously be sold in the open markets. In turn, Venezuela issued new debt instruments for US$ 4 billion maturing in the year 2027 and which create annual interest payments of US$ 370 million.

As a result then, the real difference between the “before” and “after”, and therefore the only valid basis for financial analysis, is the fact that Venezuela received US$ 1.317 billion in fresh funds. The cost of these funds will be US$ 70 million in additional interest (the difference between annual interest of US$ 300 million on the original debt and US$ 370 million on the new debt) that must be paid during 23 years until the year 2020, US$ 370 million in total interest to be paid during the seven years between the years 2021 and 2027, and finally, the capital of US$ 4 billion maturing in the year 2027. If all of this were rolled into a calculation as if the fresh funds were a new loan, the equivalent interest rate would be 8.8%.

In order to reach a final conclusion as to the validity of the swap, we must analyze whether the fresh funds are to be used to produce sufficient returns and/or social benefits over the 30 year period to merit the service of additional debt at 8.8% interest or if, on the contrary, and as has been tradition, the new debt simply adds to the country’s troubles.

Obviously, all this requires personal appreciation. In its analysis, the Government has used the basic premise that its management of the funds will produce a return of 10% per annum. The result, therefore, is positive. For those who believe that the government does not have a plan of action that will guarantee sufficient returns, the result is negative. Financial analysis shows that both could be right. It all depends which lens you look at it through, or in financial jargon, which discount rate is being used.