Forget the market for a while

The financial markets are continually boasting about having the best information available. They are right, but this continuous improvement in their capability to disseminate information comes at the cost of too much data too quickly. This results in an increased sense of the short term and no long-term vision.

It is only this that could possibly explain why today’s financial markets would impose interest rates on a country’s foreign debt that are so high that they can only be justified by the premise that the corresponding debt is to be repaid immediately and all at once. This is the case of Venezuela, a country with relatively little external debt.

This particular problem of disinformation in an era of information has resulted in an increasing volatility of the short-term capital market. This in turn has caused financial crises in many of the emerging markets and is being closely studied by many of the world’s monetary authorities.

In an article titled The Reform of International Financial Architecture published in Madrid’s newspaper ABC, Robert Rubin, former Secretary of the Treasury of the United States, recognizes the market’s basic responsibility, declaring that he is convinced about the need for government intervention in order to insure a better-market performance.

Mr. Rubin states that it continues to be necessary to solve the shortfalls in the risk valuation that have contributed to the worsening of the recent crisis and suggests that intervention should be made in the form of better international directives (i.e., the Basel Committee) which would increase dependency on long term loans instead of short-term financing. This type of intervention seems to me to be rather timid.

As a citizen of a country that due to internal and external causes finds itself in a bit of a mess, I wish to take advantage of the appointment of Mr. Lawrence Summers as new Secretary of the Treasury to ask him be more proactive.

For example, we would advance in leaps and bounds towards Mr. Rubin’s objectives should the United States guarantee the underwriting of a Venezuelan debt issue for US$ 25 billion with 30 year maturities with which Venezuela would repay all current debt that carries shorter maturities, which would make Venezuela one of the most solvent debtors in the world, which would make its debt instruments among the most attractive in international markets, which would insure that these could be placed at reasonable rates, which would allow the United States to free itself of any and all obligations thus obtained in a matter of minutes or hours.

Impossible, you say? Today, a firm that sells books, with no major asset base, and without immediate prospects of turning a profit is valued by the capital markets at US$ 30 billion, based primarily on its presence on the glamorous Internet. I simply cannot believe that the United States and Venezuela together cannot jointly put together an operation and negotiate the appropriate guarantees so that all parties come out smelling like roses.

I think that the majority of the authorities, government officials, professionals and individuals like Rubin, Summers and, modestly, myself, respect the free-market forces and system but also believe that it is sometimes necessary to promote government intervention. Where we may differ is in how this intervention should be enacted and how these two agents, market and government, should interact.

For example, over the last decades, the perception has been that a country like Venezuela should be very attuned to the requirements of a sophisticated financial international market. Attaining this markets approval would theoretically ensure that this country is on the right road to development and prosperity.

I believe this has been exaggerated. A country like Venezuela, which banks basically on one exportable product, has certain internal advantages and strategic strengths.

There is no reason why this country should bow to market forces. It has the right, and even the duty, to develop other options to ensure development that don’t necessarily include the markets.

Perhaps our problem today is not Venezuela’s external debt per se, perhaps our problem is the market. Faced with this reality, let us go out and negotiate options, government to government. This does not have to include subsidies or hand-outs. These options can very well be developed in an economically more reasonable atmosphere than that present in today’s market.

The bad habit of external public debt

I am amongst those who believe that one of the most important reforms we can bequeath to future generations of Venezuelans would be that of forcing the country to begin a gradual but real amortization of its external public debt. When the latter reaches zero, we should then constitutionally prohibit new indebtedness.

I consider this perfectly justifiable due to a) the dreadful experience we have had in the past with our public debt; b) the fact that even the slightest improvement in the country’s economic climate incites the international financial sector to press more loans into our hands; and c) the fact that it must be very difficult for our leaders to resist the temptation of reaching out for those new resources.

The arguments are simple and unsophisticated. As such, they are of little help in the battle against the thesis, universally accepted, that foreign debt is absolutely necessary in order to maximize the development of a nation. This thesis is even considered applicable in countries like Venezuela, which receive resources from sources other than debt that amply surpass its capacity to digest them efficiently.

I obviously believe in access by the private sector to the international capital markets. If there were no public external debt, the market conditions in Venezuela would be very different from those we have today. Today’s conditions could be summarized as being 3% over a country risk factor of 20%. It is difficult to take on debt in Bolívares at 70% interest even when there is the “hope” that inflation or devaluation will erode the real cost of the debt. It is virtually impossible to contemplate debt in Dollars at 23% interest when taking into account that inflation in the United States is somewhere around 2% per annum and the world threatens to hit us with recession.

Today, every politician agrees with the thesis that we should shrink the size of the public sector and reduce the number of public employees. The majority of them are in favor of the “bit-by-bit” method, arguing that these layoffs should be implemented only when the private sector creates the offsetting job opportunities. The classic case of the chicken or the egg!

The private sector will only be able to be the motor of development when the mortgage of the external private debt that indirectly taxes its activities is removed. We cannot expect the help of banks and the international financial entities with this task. For decades, we have heard their calls for the reduction of the public sector while, with the same breath, they request the Republic’s guarantees in order to lend resources to the private sector.

One of the main worries the common Venezuelan citizen harbors is that solutions to the mismanagement of our current public debt, such as the partial sale of PDVSA or Citgo, will only contribute to the continuation of the orgy of bad administration of the State. I am sure that if we managed to implement a credible constitutional prohibition that will assure the population that our national debt crisis will not be repeated, it would be possible to reach a consensus.

The key word, of course, is “credible”. If we have learned anything from our past experience with modern democracies, it is that they have an immense capacity of altering their course in order to satisfy short term aims. Today we may applaud the prohibition mentioned above. Tomorrow they would probably look for our applause to lift the same prohibition.

A proposal such as this one, evidently has many natural enemies. On top of our leaders that like to win votes by using easy money, we also find the bankers that wish to place their resources, easily, with high yields and with “safety”.

When we say “safety” we mean that in our unreal world, a banker that lends funds to a private sector company that then goes broke due to the government’s erroneous policies, puts his job at risk while the banker that only lends to the government, thereby abetting those very same policies, normally does so without risking his personal hide.

There are other enemies, not necessarily natural ones. These maintain that is in unpatriotic to limit the State’s attributions. These enemies can be recognized by the ease with which they maintain in the same breath that the actual debt is bad but that future debt is good. We remind these people that to govern while recognizing human failings and thereby avoiding further damage cannot possibly be unpatriotic.

To continue to believe egoistically that the next government, or the one after that, will not repeat the same errors is surely treason. If there is one nation in the world that can attest to this fact, it is Venezuela. The immense resources from the country’s oil production has not contributed much to the country. Certainly, the debt it has contracted has not contributed at all.

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

https://radicaldelmedio.blogspot.com/1998/10/sobre-confianza-mala-y-desconfianza.html

If I were president (I)

I have been writing articles that have been published in the Daily Journal for almost one year now. I realize that most (although not all) have been quite critical. As a result, I have been the target for calls from acquaintances who ask me things like “quit criticizing so much; what would you do­?” I herewith try to answer these questions. This is the first of two parts, the second of which will appear in tomorrow’s issue.

Upon contemplating the current state of affairs, it is evident that we urgently need to restructure everything (or almost everything), and that the latter should probably be much more radical than what our official presidential candidates imagine or would dare talk about. The following would be my agenda for the first 100 days, were I to sit in Miraflores as President of Venezuela.

Day 1 / Morning: There would be a very simple swearing-in ceremony that would not be attended by visiting dignitaries. At least 50% of the attendees to this ceremony would be young people, less than 18 years old. Immediately thereafter there would be an emergency session of Congress during which Venezuela would be declared in a state of emergency, a state that is in perfect sync with reality. Emergency powers that would allow the President to confront such a situation would be requested. These powers would be similar to those awarded anyone out to perform a salvage operation and without which nobody reasonably sane could be expected to assume the responsibility of restructuring our country.

During this same session, Congress must approve a Bond issue under the acronym Public Sector Restoration Bonds (PSRB). These bonds are to be 30-year instruments, US Dollar denominated and carrying interest rates similar to those paid by the United States. These resources will be used to liquidate public payrolls. Immediately thereafter, two constitutional reforms should take place as follows:

First Amendment: A total reform of the mechanisms that are used to elect Judges. Any of the many projects that have been tabled recently can be used, most of which are useful but none of which have found their way to implementation.

Second Amendment: A total ban on any new net foreign indebtedness for the public sector (including PDVSA). In addition, the country must accept the obligation to amortize a minimum of 1/30th of the current global debt annually. Venezuela’s current oil income should be sufficient to cover all public sector spending. If it is not, the government is being inefficient and the last thing we should be doing is accepting further a heavier debt load.

Day 1 / Evening: Should Congress balk at these requests, I, as National Executive must strive with all available means, including that of closing Congress, to achieve the reforms. Should this still not be enough, I would immediately offer my resignation and convene new elections. This would avoid a) further degeneration of the stature of the office of the President and b) the wasting of another five years of the country’s destiny.

Days 2 through 99: We would initiate a series of emergency measures aimed at the reorientation of our nation’s destiny. As an example, among these would be the following:

Social Security: A single central system would be put into place to implement the payment of pensions for public sector employees. The regulations for this would establish that a) the minimum and maximum payment amounts; the maximum cannot be more that three times the minimum; b) any pensioner that is eligible for various pensions can add them up until he reaches the maximum established; c) payments will be made in strict inverse order, that is, the lower payments will be handled before the higher ones; no way will we pay out millions while our grandparents (los viejitos) have to take to the streets; d) we will unify, downwards if necessary, the pension amounts to be received by retired people of the same category and seniority; we will not differentiate between teachers with 30 years’ seniority that retired in 1976 from those retired in 1996.

If all of this means that some current obligations are not covered, so be it. Remember, the country has been declared in a state of emergency. The default of these obligations will be explained face-to-face, and not as it has been done until today, by hiding behind the curtain of inflation.

Government team: The government’s duties will be executed by a multidisciplinary team, small enough to be housed in one building. We will initiate the relocation of Congress and the administrative and clerical functions of government other cities in Venezuela.

Part II will follow tomorrow with more examples of my government’s agenda.

Treading deeper into red

As we all know by now, PDVSA has recently managed to successfully float a bond issue for US$ 1.8 billion in the international financial markets. Mr. Giusti, its President, as well as some external market analysts maintain that PDVSA’s asset base is immense while its debt load is relatively small. According to all of them, the company should be in a position to use more leverage.

As a Venezuelan citizen, father of three other Venezuelan citizens and therefore, at least in theory, a minority shareholder of PDVSA, I must admit that rarely have declarations by “people in the know” caused me so much anguish.

Venezuela used to be the target of the international financial community due to the existence of vast oil sector assets and reserves that ranked us among the wealthy nations of the world. This resulted in the contracting of loans that ultimately resulted in our overbearing external debt load. These resources have been poorly managed and have definitely not contributed to the well being of the country.

Should PDVSA now go out and contract debt and issue liens or mortgages on our petroleum assets without insuring that the resources obtained thereby are used to repay debt previously acquired, we are condemning the country to total ruin.

Evidently we all know about the fiscal bind we are in as a consequence of the fall in world oil prices. It is easy to argue in favor of new indebtedness as a transitory way of squaring our national accounts when the alternatives are 1) inflation as a result of fiscal deficits or 2) deepening recession due to an effort to balance the before-mentioned fiscal accounts.

What is not, and cannot, be permissible is to allow PDVSA to take over roles corresponding specifically to the Ministry of Finance and the Central Bank. The nation also cannot allow the evasion, via PDVSA, of the few instruments still in place, which allow us to control national debt levels.

Until now, I figured there was a great national consensus about the need to keep PDVSA’s balance sheet basically free of liabilities. The evidence seemed to be there. To begin with, PDVSA’s current debt doesn’t reach US$ 4 billion. On top of this, the Oil Opening was justified on the basis of a lack of resources available in PDVSA for future expansion. Evidently, the company’s debt capacity was not taken into account then.

We can also clearly remember that during all the restructuring processes undertaken by Venezuela in the past and which finally resulted in the Brady Bond issues, any alternative which was to involve PDVSA’s assets in one way or another as a basis for the restructuring was rejected outright.

We feel that something seems to have changed. From one day to the next, we are told that an offshore company, PDV Finance, has been set up to facilitate the assignation of accounts receivable or to undertake factoring transactions. At the same time, we understand that Mr. Giusti has expressed his surprise at PDVSA’s capacity for leverage. This cannot possibly surprise anybody expect those that have never even contemplated it.

We remember that a few months back, when the Brady Bond swap came to light, we were witnesses to the debate related to the application of the Law of Public Credit. For a smaller amount, many protested the fact that Congress was not properly and directly consulted. Today’s silence, then, is outright baffling.

I sincerely hope, for the sake of my country, that things have really not changed radically and that someone has not decided to take the stick to the PDVSA piñata.

Some analysts have gone on record as saying that PDVSA qualifies for loans at lower interest rates, and that the country therefore has a good deal going. I remind these analysts, however, that the true final cost of any debt transaction depends on what the resources are actually used for. In this sense, our governments have been masters at converting even the most generous loans into expensive ones through sheer wastefulness.

I remind those that console themselves with the fact that the resources made available by this new debt are aimed exclusively at covering PDVSA internal requirements how fungible these resources really are. For example, the US$ 2 billion raised by the oil opening, which should theoretically have been applied towards PDVSA’s investment program, were really spent on our central “dis-administration’s” unproductive payrolls. If this permeability becomes a habit, we are merely allowing them to dig all of us deeper into the hole.

Therefore, as a Venezuelan, I also remind Mr. Giusti and his other co-Directors that their function is to be the custodians of Venezuela’s riches. Their function is not to raise the specter of generous credit lines and basically act as a croupier or as a Maecenas to the government of turn.

Speaking about trust and distrust

International financial risk rating entities are once again issuing their results for Venezuela. And once again, everyone begins to tremble. There is confidence! Ooops, there is no confidence! The debate is once again on the table and I take advantage of this to share some of my reflections on this issue with the readers.

It could be that I am not exact in my appreciation, but then again, when dealing with something as subjective as confidence, it shouldn’t really make much difference. In 1982, the then Minister of Finance decided that the country should be paying interest rates well below those being required by the international banking community in order to renegotiate part of Venezuela’s foreign debt. This decision blocked the restructuring of our foreign debt and together with the crisis in Mexico and other indebted nations combined to unleash the events which resulted in the devaluation of Black Friday of February 1983.

Obviously, the Minister was severely criticized. I considered this criticism to be unjust since, as far as I was concerned, the Minister was in reality a hero of the nation; almost enough so as to merit a statue in some important plaza. In my opinion, his actions, which generated international distrust, saved the country from billions of dollars in debt, which would have bloated the amounts actually accounted for after the disaster. Few heroes can be proven to have undertaken such important deeds for the good of the nation.

In reality, to inspire confidence in others should be of no concern for the country, while it has not been able to find or generate an economic and administrative model which inspires the confidence of its own people. Trying to do so simply confuses the search for in depth solutions. 

In addition, the persons for whom instruments of measurement are designed do not include those foreigners whose confidence we really seek. Rating agencies rank a country’s measure, principally the latter’s ability to service its debt. As such, their market is comprised of bankers and investors who simply wish to make a short-term financial investment. Nothing of special importance to the country.

Those foreigners who could really interest us are the ones who come to the country with resources, the ones with the intention of remaining here for the long-term, to put up factories, cultivate the land, generate employment and maybe even raise a Venezuelan family. That is to say, the one whose objectives are one and the same as those of the nation. The opinions and confidence of these people are not measured at all.

In addition, both the methods and measuring instruments as well as the professionals actually doing the measuring, probably continue to be the same. They are the same ones that not very long ago argued that it was impossible for a country to be bankrupt, thereby justifying stratospheric limits for indebtedness with such enthusiasm that both bankers (who by the way proved to be unprofessional in most cases) and the common Venezuelan, upon hearing this siren song, joined forces and created the mix-up of the century.

For those of you who may have any doubts about this, I suggest you look at the ranking of six months ago. In those listings, the majority of the Asian countries looked like nothing short of marvel of creation. Haven’t you recently heard all of the crying over the Asian financial crisis?

We must evidently listen to the opinions of the credit agencies. Their measurements reflect many variables of great importance for the well being of the country. Unfortunately they also are the principal source of information about the country for many foreigners. In other words, to lie awake at night worrying about ranking doesn’t make sense.

You may remember the story about the anguished debtor who could not sleep, but found a way of finally getting a night’s rest by transferring his insomnia to his banker with the simple words “I can’t pay you”. In this case, something similar occurs. I personally sleep better when Venezuela’s ranking goes down, since I am then sure that lenders will not be making additional resources available (in my name as well as in the name of my children, grandchildren, great-grandchildren and other future debtors) to governments that insist on misspending them.

The day the government, during electoral period, pays more attention to the opinions of its humble subjects than to those of the glamorous international agencies, we will finally stand a chance of making it out of our standard situation. The latter, according to all international norms I know of, can be objectively classified simply as “poor and moody”

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!

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.