Venezuela Heads to a Default Reckoning

[jimmy olsen]

Let's not get so distracted by this that we take our eyes away from the real tragedy.

http://online.wsj.com/articles/mary-ogrady-venezuela-heads-to-a-default-reckoning-1410728500

Venezuela Heads to a Default Reckoning
Amid bills for imports and debt servicing, and shrinking dollar liquidity, something has to give.

Venezuelan bond prices swooned last week on renewed speculation that the government of President Nicolás Maduro might soon default on as much as $80 billion of foreign debt. The yield on the government bond due in 2022 hit a six-month high of 15.8% on Sept. 9. David Rees of London-based Capital Economics, who last year warned of the risks of falling oil prices to Venezuelan solvency, told Bloomberg News by telephone that "the bond market is finally beginning to wake up."

That may be true. It's clear that the foreign exchange that Venezuela earns from oil exports cannot pay its import bills along with debt service. There are dire shortages of industrial and consumer goods as well as services. Something has to give and odds are that allowing the required adjustment to the economy won't be the government's first choice.

Yet it is also in the interest of Wall Street investment banks to keep the borrow-and-spend pyramid scheme going. The yields are fat and underwriting fees really beef up the year-end bonus. As long as Venezuela can keep financing shortfalls, nobody loses money. That's why default may not be as imminent as some fear. Still, it may be inevitable.

When Hugo Chávez took power in 1999 PdVSA was producing 3.5 million barrels of crude per day (bpd). By 2004 another 900,000 bpd came on stream. Venezuela was unusual among members of the Organization of Petroleum Exporters (OPEC) in that it also sold refined oil products on the world market.

But trouble was already brewing in 2002. That's when PdVSA purged some 20,000 employees for political reasons, replacing them with loyal chavistas not properly trained for oil work. Foreign-owned oil assets were nationalized. Investment slumped and accidents due to poor maintenance rose. In 2012 the huge Amuay refinery blew up. OPEC says Venezuela now produces 2.3 million barrels of crude daily.

More than half of this production does not generate foreign exchange. An estimated 700,000 barrels per day supply the domestic market and of that experts estimate that some 100,000 bpd are smuggled onto the Colombian free market by corrupt insiders. Cuba and other neighbors in the Caribbean don't pay cash for the 300,000 bpd they receive. An estimated 650,000 bpd are sent to China. But much of that is used to repay tens of billions of dollars in loans spent long ago.

The July issue of the newsletter Veneconomy Monthly, produced in Caracas, scrutinized PdVSA's 2013 annual report. The editors noted that even at 627 pages there was "little credible information about the goings on" inside the company. "Sadly, what information is available confirms perceptions that PdVSA is headed for insolvency."

Yet this does not explain the shortages. In consumer goods, for example, it is difficult to find everything from diapers, shampoo, meat, milk and bread to car parts and batteries, rubbing alcohol and medicines.

Domestic production has been crippled. According to the central bank, in 2013 69% of imports were inputs that local producers use to make finished products. But suppliers need to be paid.

The official exchange rate is 6.3 bolívars to the dollar. But because the central bank increased the money supply (M2) by 70% in the past 12 months and 63% in the 12 months before, the value of the bolívar has plummeted. The central bank would lose all its dollars overnight if it satisfied the demand for greenbacks at the official rate. Instead it sells a limited quantity of dollars at higher (but not market) rates. "Priority" businesses are allowed to buy some dollars every week at just under 12 bolívars to the dollar and some other lucky ones make purchases at 50:1.

Dollar liquidity is shrinking. One independent analyst tells me that government dollar sales in the first half of 2013 were down about 20% from the same period a year earlier and sales in first-half 2014 were some 30% lower than the same period in 2012.

The black-market exchange rate of 90:1, which those without connections must pay, is too much for producers subject to price controls on their finished products. Layer on labor laws that would make Mussolini blush, and Cuban-run ports through which goods move at a glacial pace, and it is easy to see why production has collapsed.

The worries about a default are exacerbated by the news this summer that PdVSA is putting Citgo Petroleum, valued around $10 billion, up for sale. Caracas may be trying to raise capital. But it also might be trying to minimize its exposure to asset seizures in the U.S. if it stiffs creditors.

Venezuela says it will pay its debts. But as the epidemic of inflation and poverty worsens, who doesn't believe that the 21st-century socialists will find it easier to blame the capitalists than to blame themselves?

[DGuller]

It's amazing how South Americans manage to shoot themselves into the same foot with the same gun again and again.  It's sad that it seems like there is no third option for them:  it's either fascist junta or destructive socialists.  Any other state seems to be just a transition state to one of these two options.  Only Chile seems to be going somewhere.

[Valmy]

And the cycle sadly continues.

[jimmy olsen]

It's amazing how South Americans manage to shoot themselves into the same foot with the same gun again and again.  It's sad that it seems like there is no third option for them:  it's either fascist junta or destructive socialists.  Any other state seems to be just a transition state to one of these two options.  Only Chile seems to be going somewhere.

Brazil's been doing okay, hasn't it?

[DGuller]

It's amazing how South Americans manage to shoot themselves into the same foot with the same gun again and again.  It's sad that it seems like there is no third option for them:  it's either fascist junta or destructive socialists.  Any other state seems to be just a transition state to one of these two options.  Only Chile seems to be going somewhere.

Brazil's been doing okay, hasn't it?

So far, but they're far from being out of the woods.  It also doesn't help that they seem to cozy up to China and Russia, which tends to be problematic for healthy societal development.

[Tamas]

It's amazing how South Americans manage to shoot themselves into the same foot with the same gun again and again.  It's sad that it seems like there is no third option for them:  it's either fascist junta or destructive socialists.  Any other state seems to be just a transition state to one of these two options.  Only Chile seems to be going somewhere.

The only South American state doing ok is the only one which embraced liberal economics for a while at least? 

[jimmy olsen]

By the way, some kind of hemorrhagic fever or maybe pneumonic plague has broken out there, but the government is denying and throwing doctors in jail for being spreading terrorist propaganda. I'm sure that will go well.

[Darth Wagtaros]

By the way, some kind of hemorrhagic fever or maybe pneumonic plague has broken out there, but the government is denying and throwing doctors in jail for being spreading terrorist propaganda. I'm sure that will go well.

You talking Chile or Venezuela?

[jimmy olsen]

By the way, some kind of hemorrhagic fever or maybe pneumonic plague has broken out there, but the government is denying and throwing doctors in jail for being spreading terrorist propaganda. I'm sure that will go well.

You talking Chile or Venezuela?

Venezuela of course.

Some Spanish sources posted in here, who knows how credible it is. Doesn't seem to be Ebola though.
http://www.flutrackers.com/forum/showthread.php?t=227561&page=2

[Eddie Teach]

Let's not get so distracted by this that we take our eyes away from the real tragedy.

Cal is crying and he doesn't know why.

[Barrister]

It's amazing how South Americans manage to shoot themselves into the same foot with the same gun again and again.  It's sad that it seems like there is no third option for them:  it's either fascist junta or destructive socialists.  Any other state seems to be just a transition state to one of these two options.  Only Chile seems to be going somewhere.

Brazil's been doing okay, hasn't it?

On Facebook the other day I saw a friend request from my brother's father-in-law, who is retired Brazillian military police.  I accepted the request, and now my news feed is chock full of portuguese-language anti-Dilma screeds.

So, anyways, at least some in Brazil don't think it's doing so okay.

[derspiess]

On Facebook the other day I saw a friend request from my brother's father-in-law, who is retired Brazillian military police.  I accepted the request, and now my news feed is chock full of portuguese-language anti-Dilma screeds.

So, anyways, at least some in Brazil don't think it's doing so okay.

After accepting a couple friend requests from my wife's cousins, my Facebook feed is jammed with posts in Spanish about animal abuse and missing Argentine people.

[Admiral Yi]

On Facebook the other day I saw a friend request from my brother's father-in-law, who is retired Brazillian military police.  I accepted the request, and now my news feed is chock full of portuguese-language anti-Dilma screeds.

So, anyways, at least some in Brazil don't think it's doing so okay.

That might be a function of efforts to raise the Brazilian public sector retirement age above 32.

[Sheilbh]

It's amazing how South Americans manage to shoot themselves into the same foot with the same gun again and again.  It's sad that it seems like there is no third option for them:  it's either fascist junta or destructive socialists.  Any other state seems to be just a transition state to one of these two options.  Only Chile seems to be going somewhere.

Brazil's been doing okay, hasn't it?

Yeah. Especially for Brazil. Peru and Uruguay as well.