Stabilization

The Economist has an article about the chances of a Venezuelan bond default. It manages to go the whole story without mentioning that news articles about the risks of Venezuelan debt are something of a self-fulfilling prophecy, as people get unduly scared of default, raise borrowing costs, and thereby increase the chance of default. The article neglects to mention the single biggest argument against Venezuela defaulting — it needs financing for $250 billion worth of oil projects. If there’s anybody who’s going to be a victim of default, it’s state employees, especially when it comes to many billions of dollars in promised retirement packages.

But one item in the Economist story really jumped out as a surprise. Venezuela’s long-running stabilization fund, an attempt to pull dollars out of circulation during good times so they’d be available in bad times, has all but disappeared. According to this Central Bank Excel sheet, the government took all but $3 million out of the account on Feb 1 — a withdrawal of $829 million. That money was sitting there for as long as I’ve followed Venezuela. Makes you wonder why PDVSA suddenly needed U.S. dollar liquidity.

5 thoughts on “Stabilization

  1. westslope

    1. The self-fulfiilling prophecy-driven financial crisis panic applies to all similar situations. Is there a specific reason why it would merit mention in the case of Venezuela?

    2. Perhaps you could explain why the “need” for oil investment would prevent a debt default. That doesn’t make any sense to me at all. The presence of known oil reserves in the ground will influence debt-financing and re-financing terms by making Venezuela debt look more attractive.

    If anything the “need” for investment makes Venezuelan sovereign debt look even less attractive.

  2. sapitosetty Post author

    1. Yes, because there are few places in the world where the media reputation is so universally negative. Comparing the reputations of “bad Latin America” with “good” — Venezuela, Bolivia and Ecuador with Chile, Peru and Colombia — and you’ll see similar problems (Dutch disease, corruption, inadequate infrastructure, violence) treated as graver in “bad” South America and similar victories (drug busts, anti-poverty programs, clean elections) getting more attention in “good.” Venezuelan elections are probably cleaner than Colombian or Peruvian. Dependence on a single export in Chile is almost as bad as it is in Venezuela. Tropes matter.

    2. There are always 2 issues with sovereign debt: ability to pay and willingness to pay. Ability may be suffering, which could indeed cause a crisis. But willingness to pay is going to stay present as long as the country needs international financing. So far, the government has shown itself to be much quicker to cut payments to its own people (payroll, retirement, payments for nationalized property) than to cut payments to international bondholders.

  3. Kepler

    Setty,
    Is Chile’s dependence on copper that bad? I forgot the figures but I think I had read copper made much less than 91% of exports, which is what oil makes for Venezuela. Then there is issue of adaptability. My country is, and this is a fact, bottom of the group when it comes to basic education.
    My bet is Venezuela will have much more trouble recovering from any collapse or even stagnation in oil prices than Chile. Man, I plotted the oil price increases next to GDP growth. Venezuela is completely high on petrodollars, it needs ever higher price HIKES just to keep up with it all.
    Of course, every national thinks his country is special but in this case, it’s true :-): Venezuela es una vaina aparte

  4. westslope

    I believe you are making the wrong comparison. Venezuela is being punished with higher capital costs because of previous national governments that a) conducted similar populist and myopic fiscal policy, b) took assets from private owners at below market cost, and/or c) let inflation get out of control .

    Will the observed discount exceed some ‘objective’ discount estimate? Almost always. Markets invariably overshoot and undershoot particularly in the context of perceived political risk.

    I keep seeing large numbers of ordinary people yelling in the streets the following: “WE DEMAND MORE EXPENSIVE CAPITAL! It is our right!” Well, not exactly those words, but words to that effect.

    Bad economic and fiscal policy is far too often both popular and highly democratic.

    This is no longer about ‘left’ versus ‘right’. Or at least it should not be. Take the authoritarian socialist republic of China. It has managed to grow income, save and grow sustainable real per capita wealth.

    Take the mixed, freemarket economy of Norway where government ownership is high, regulations are onerous, the state take is steep, and the welfare safety net is generous.

    If you want the state to play some discretionary hardball with outsiders, look no further than the brilliant example of the Canadian province of Québec. Les québécois are masters at using non-tariff barriers to give an advantage to the home team. Fiscal policy could be more conservative. But foreign investment is welcome and property rights for foreign capitalists are among the most secure in North America.

  5. Roberto N

    “..According to this Central Bank Excel sheet, the government took all but $3 million out of the account on Feb 1 — a withdrawal of $829 million. That money was sitting there for as long as I’ve followed Venezuela. Makes you wonder why PDVSA suddenly needed U.S. dollar liquidity.””

    Como se dice “pension fund investigation by the SEC” in Spanish?

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