My four long-time held principles for a good restructuring of Venezuela’s/Pdvsa’s debt.

A restructuring to be initiated when its corrupt, inept criminal and human rights violating regime has been thrown out and law, justice, democracy and respect for private property has returned.

1. Not only for Venezuela’s sake, but also for all the citizens of the world’s sake, exploit Venezuela’s debt problem in order to establish clear definitions of what should be considered bona fide credits and what odious credits, and what different treatment should be given to these.

2. Align the incentives of the creditors so as to work for having Venezuela’s economy grow instead of extracting from is economy whatever they can. In Venezuela’s case that is quiet straightforward. Have the creditors identify and help finance who can in the shortest-term possible, increase the oil it extracts and exports.

3. In order to align the incentives that will allow such debt restructuring to take place in peaceful and sustainable terms, have all the nations’ net oil revenues to be shared out 15% to its creditors, 34% to Venezuela’s central and local governments, and 51% equally among all Venezuelans.

4. Before the three aforementioned conditions have been formalized Venezuela should thankfully, gratefully accept all humanitarian help given but should not waste one cent of all those bridge loans from here to there that it could be offered, for instance by the IMF.

That should help Venezuela’s legitimate creditors to recover their loans, its government to have to rely more on what the citizens pays it in tax so as to be held more accountable and, foremost, allow Venezuelans to live in a nation and not just in somebody else’s business.

Odious Debt

One of my recent articles, which focused on the need to protect the environment, concluded by recalling the ancient proverb, “We have not inherited the world from our parents; we have borrowed it from our children.” On that occasion, as always, I thought about Venezuela and I knew that, as borrowers from our children, we have acted like veritable pigs. Not only have we extracted our country’s oil without putting it to much good use, we have even mortgaged its future in the process.

Some countries may be in need of foreign loans to get on their feet, but here in Venezuela we ought to know by now that our foreign public debt, be it the debt of yesterday, today, or tomorrow, only serves to fasten us all the more securely to a sinking ship. Foreign public debt is a monstrous obstacle. It keeps our citizens from getting loans (or at least makes loans much more expensive) that could indeed lead to growth in the country and allow the government to satisfy social needs through taxation.

Our only salvation is to learn how to resist the lure of the eternal sirens’ song, which goes “foreign debt taken on by the previous administrations is evil and good for nothing, but rest assured, with us, everything’s going to be different.” How do we—like the ancient Odysseus—tie ourselves to the mast?

There are those, in similar desperation, who argue that since our creditors were accomplices of those administrations, we shouldn’t pay our debts to them. I accept the theory of complicity, at least on the part of the intermediaries, but I think we should punish them much more harshly, by canceling the entire debt and never again taking out another loan.

What can ordinary citizens do who want to and have to go about their daily lives and can’t be continually overseeing the government? The same as any company: they can refuse to provide their management with authorization for contracting debts. Along these lines, a doctrine is now being discussed in the world according to which, if the debt was contracted by an illegitimate government, or for uses that were clearly of no benefit to the country said debt could be declared odious and, as such, its collection would not be legally enforceable.

Dear friends, if we are going to do right by our children, our grandchildren, and our great grandchildren, and return the country we borrowed from them in good shape, maybe we should take advantage of such a possibility and declare our foreign public debt eternally odious. Given that threat: Would creditors dare provide us with loans? What would the credit-rating agencies say? 

Or let us be even more clear about the message and amend our constitution to say that the government of Venezuela has no authority to borrow from foreign sources, that any attempt to do so is illegal, and hence that all such illegal debts will not be repaid. That should stop foreigners from lending us money!

Translated from El Universal, Caracas, March 25, 2004

What the world needs now… [is growth sweet growth]

The United States of America is the only economic engine that keeps today’s low world growth rates from degenerating into a horrible global depression. It is no wonder, then, that all eyes are on this country’s economic performance. 

Actual consensus, based on a fiscal surplus, a very low unemployment rate and a basically non-existent inflation rate, implies that this performance is nothing short of spectacular. For those who still doubt, it should be enough to simply analyze the incredibly high acceptance rating garnered by President Clinton in spite of events which in other times, due to their nature, would most probably have resulted in his impeachment.

I would classify all other nations in two broad groups. The first group consists of those countries that have lost the international market’s confidence and who reluctantly or not must accept traditional Monetary Fund style recipes such as the reduction of fiscal deficits and increases in interest rates. 

The second group includes those that still can count on basic strengths. Japan, for example, is one of these. Apart from lowering interest rates to their minimum expression, they dabble (albeit sometimes timidly) with Keynesian measures such as the issue of consumer coupons.

Confusion basically exists only in Europe. There is still much discussion between the European Central Bank, wishing to prove its orthodoxy in the face of the birth of the Euro, and the individual governments, anxious to get their economies back on the road of growth.

You may ask why, as a local columnist, I am writing about the world economy. There are two basic reasons. The first is that Venezuela is a living example that helps us to remember what happened during those times when each country tried to put its house in order individualistically. The accumulated global result was worldwide economic contraction. By striving to adopt measures gleaned from the manual of good economic behavior, our country slowly managed to go from a state of obesity to one of severe economic anorexia, a condition which makes it impossible for companies to pay adequate salaries and for those who receive this meager pay to purchase goods or services from those same companies. The world should pay attention so it can avoid going the same route.

The second reason is simply the need to alert anyone who will listen as to the fact that it is absolutely necessary for Venezuela and the world in general to get back on the track of international growth. In Venezuela’s case, the situation is obvious. Either we grow or we disappear. Simple as that! It is slightly more difficult to perceive the urgency of the situation globally, except for those countries that, like Venezuela, have had serious problems with their debt load.

I am under the impression that due to the abundance of bad news generated by the world today, which in turn promotes belief in wonderful saintly Superman-like saviors, markets have blithely been ignoring the increasingly nettlesome problem of the United States’ commercial deficit. Please do not confuse the message with the messenger. I don’t wish to stoke the fire, but I do wish to remind everyone that this country’s commercial deficit boils down to a whopping US$ 1 billion per day.

Since the United States’ public sector maintains that it’s budget is in the black, the only economic counterbalance to the above mentioned commercial deficit is the private sector’s indebtedness. In other words, the fuel that today’s economic engine has been using to continue on its most opportune buying binge, in the best “its cheap, give me two” tradition, is the funding that the rest of the world pumps into its tank. In Venezuela, we can safely testify to the fact that this source of energy does not last forever.

There is only one way that the world will survive this problem relatively unscathed. It must simply begin to grow again before the problem begins to cause strong increases in dollar interest rates, driven either by the United States’ need to curb its growth rate, contain internal inflationary pressures and control its commercial deficits, or by an international market that will slowly but surely loose its confidence in the dollar’s future.

To grow! So easy to say, but so difficult to actually do. Above all else, however, I believe it is the result of mental attitude. 

Amongst friends I have often said that when citizens of the United States decide to buy goods and services from one another and go out for dinner every evening, the consequence is growth. When Europeans, in a steadfast show of responsibility in the face of hardship decide to stay home, the result is contraction.

Simply put, what Venezuela and world urgently needs, is leadership that knows how to stimulate growth sweet growth.

About bad trust and good distrust

About bad trust and good distrust 

Once again, the international financial classification agencies are speaking out about Venezuela and everyone is trembling. Its results constitute for many foreigners and, unfortunately, also for some Venezuelans, a primary source of information about the country. The debate on concepts, such as trust and international capital mobility, begins again. I take this opportunity to present again some evidence, reflections and conclusions in this regard.

Evidence 1: There is no doubt that the vast majority of actors in the short-term speculative capital market respond, to all types of events, like a stampeding herd of buffaloes, entering or leaving a country. The above causes high volatility in these funds, which are correctly called swallow capitals.

Reflection 1: As in so many other fields, in finance, the rule also governs that errors committed by many of the participants and therefore shared, are forgiven, while those, committed alone, are punished. As a result of this, the professionals who manage these funds and who wish to save their own professional prestige will be prone to go with the flow, that is, their actions will obey more to fashionable financial criteria and not to what may be indicated. your own experience or instinct.

Conclusion 1: According to the above, it is perfectly irrelevant that professionals are “geniuses”, since other reasons guide their actions.

Evidence 2: The global debt crisis of 1982 caught many bankers with their pants down, indecently exposing huge amounts of bad loans. More recently, we can name the obvious errors contained in the reports on Asia 18 months ago.

Reflection 2: I remember my astonishment at the reverence with which, in 1983, the “qualified” opinions of those same bankers, who had so recently demonstrated the limitations of their genius, were heard. The same thing happens today. Could it be that the human need to seek order in the world drives us to attribute magical knowledge to a group, which they brazenly exploit?

Conclusion 2: The truth is that the world is very naive when it places a good part of its economic destiny in the hands of people with “such a good resume” but such a “bad track record.”

Evidence 3: The volumes of swallow capital present in the market are gigantic, when compared with the economic magnitudes of many countries, which is why they can cause great havoc.

Reflection 3: Given the magnitude and volatility of these funds, it is expected that the main damage will occur at the entrance and exit doors, where it would be logical to anticipate a certain crowding.

Conclusion 3: Knowing the existence of quite successful methods (Chile), to manage, in a somewhat more orderly manner, the entry and exit of these funds to the country, the fact that nothing similar has been developed in Venezuela, It is another evidence of the government's apathy that punishes us.

Evidence 4: Economic decisions made by long-term investors, both foreign and domestic, take time to execute. For example, the decision to open a factory or to build a hotel or to plant a forest is not made overnight. On the contrary, swallow capitals react in seconds, via purchase and sale orders and electronic transfers. Its economic impact is, therefore, much more immediate and explosive.

Reflection 4: I believe that the most important economic signals for a country emanate from long-term actors, such as the hotelier from Cumaná, the rice farmer from Calabozo and the industrialist from Guacara. However, the urgency and immediacy represented by the pressures of the swallow capitals probably means that the latter manage to attract too much of the attention of the economic authorities.

Conclusion 4: As long as the economy (and politics) obeys, to a greater degree, the young man with gelled hair and suspenders who rules the short term, ignoring long-term signals, the path to economic disaster will remain clear of obstacles

Evidence 5: Venezuela has received an extraordinary amount of resources over the last 25 years, in the short and long term, and they have been of no use. Venezuela, in recent years, has received important long-term funds and they have not been of much use either.

Reflection 5: If we do not know how to manage the resources granted in the long term, what are we doing trying to attract short-term resources?

Conclusion 5: As long as a viable economic development model and a government system that inspires confidence have not been established, the country should not be interested in swallow capital at all, even if it has an efficient gatekeeper to regulate the entry and exit.

Evidence 6: “Credit rating” agencies, despite being used by many diverse actors, such as banking and insurance regulatory entities, with long-term interests, in reality, work mainly for bankers and investors who wish to take liquid positions at short term.

Reflection 6: For someone interested in the long term, for example, a young citizen, the opinions of a “credit rating” agency can be quite irrelevant. Also, know that not every expression of distrust produces bad results.

Consolation 1: Venezuela, in recent years, has not been subject to an invasion of swallow capital as large as it could have been. Imagine the chaos that would occur if some $20 billion of hot money had entered the country and today they were anxiously seeking its way out. The interest rates needed to contain such a herd would have to exceed four digits.

Consolation 2: Do you remember the story of the anguished debtor who finds sleep when with “I can't pay you” he transfers his insomnia to the banker? In our case, something similar happens. When the Venezuelan score goes down, personally, I sleep better, safe in the knowledge that they will not be giving so many resources, on behalf of myself, my daughters and future descendants, to governments that insist on wasting them.

Conclusion 6: The day our governments (during non-electoral times) pay more attention to the opinion of their humble subjects, instead of the opinion of the glamorous international agencies, that day we will have a greater chance of getting out of this situation of ours , which I can only classify and, forgive my English, as a “standard moody and poor”.

https://unsustainabledebtsustainability.blogspot.com/1998/10/about-bad-trust-and-good-distrust.html

If I were president (II)

In yesterday’s installment I mentioned the fact that the first thing I must receive in order to responsibly comply with my presidential obligations are certain special powers. Supposing I actually received these powers, I then began to list some of the concrete measures as an example of what I would do during the first 100 days of my term in some specific areas of concern. Here are some more.

Education: A single, all encompassing data base must be put together, identifying each and every active teacher on a school-by-school basis. These teachers will immediately receive an increase in pay and an additional fixed percentage of the payroll amount will be awarded each school to cover administrative expenses. Evidence of false information will result in the immediate suspension (for lying, aiding or abetting) of all the teachers of that particular school. All others that are unduly receiving pay without working from the Ministry of Education will be awarded eternal vacations without pay.

Reduction of public spending: In order to rationalize public spending, as similar strategy as the one above will be implemented. All personnel that are to be dismissed will be paid the equivalent of three month’s salary and all other severance payments will be paid in the form of negotiable Public Sector Restoion Bonds (PSRB). The value of these bonds will increase in the measure that restoration of the public sector is successful.

Infrastructure: All savings from the restructuring process will be invested, after covering fiscal deficits over 3% of GNP, in infrastructure projects, such as energy and water for Margarita and Zulia and a truly nationwide railway system.

Housing: The Central Bank must immediately make available through the private banking system, a credit facility to the tune of US$ 2 billion aimed at issuing long term loans in US$ and fixed rates for acquisition of housing.

Foreign investment: Foreign capital investments will be regulated in order to minimize damage caused by short term capital flight (i.e., the Mexico syndrome). Other countries in Latin America have such regulations in place.

Economic diversification: The oil sector does not create employment. Venezuela’s commercial policies must be renegotiated to achieve the equilibrium of our trade balance in terms of employment generation and not balance in monetary terms as it stands now. An annual budget will be allotted to allow for the protection of certain sectors of the economy, specifically agriculture. Cover under this scheme will be allocated to those sectors within agriculture that we can be competitive in without excessive costs (i.e. rice rather than apples).

Petroleum/Petrochemicals: PDVSA will continue to manage the development of our petroleum industry. However, a special Office of the Petroleum Ombudsman (OPO) will be created. This will allow the common citizen to get closer and to increase his knowledge and control of what is the country’s principal asset. The members of this office will be elected at random from among a list of candidates that have been carefully screened, have complied with some basic requirements and have been presented as such by the Venezuelan people. The Office will be initially asked to analyze why the industry is spending its precious resources in rebuilding a slew of gas stations. In the same sense, I would like to insure that our petrochemical industry is not just reopening Sidor’s covered grave with its new investments.

Taxes/Duties: There will be no more value added tax (VAT) as long as the country continues to perceive significant income from oil. Customs at our ports will be handed over to the private sector management. This will ensure that income that should reach government accounts does not continue to feed unscrupulous individual pockets.

Superfluous functions: Until the State begins to perfectly comply with its responsibilities in fundamental areas such as education, health and security, all other superfluous functions will be suspended. For example: if the local stock market really needs a regulatory entity such as the National Security and Exchange Commission, the market must cover the costs incurred. Today, it is preferable to stamp each issue with the words “Beware – Not Regulated” than to create the false illusion that some control is imposed, and in some instances, actually abet fraud through simple omission.

Day 100 – Evaluation: If my team and I are not able to successfully implement our government’s plans, we must resign and convene new elections. Remember, I have initially made a promise to resign without pension and without a seat as Senator for life in order to avoid a) further degeneration of the stature of the office of the President and b) wasting another four years and nine months of this poor country’s destiny.