Defaulting On Venezuelans

This article by Ricardo Hausmann and Miguel Angel Santos is getting attention from Venezuela-watchers (and President Maduro, who hated it – so you know they’re on to something). The pair argue that the country should default on its sovereign debt, because the government’s commitment to paying its creditors effectively means it’s defaulting on its citizens:

Severe shortages of life-saving drugs in Venezuela are the result of the government’s default on a $3.5 billion bill for pharmaceutical imports. A similar situation prevails throughout the rest of the economy. Payment arrears on food imports amount to $2.4 billion, leading to a substantial shortage of staple goods. In the automobile sector, the default exceeds $3 billion, leading to a collapse in transport services as a result of a lack of spare parts. Airline companies are owed $3.7 billion, causing many to suspend activities and overall service to fall by half.

In Venezuela, importers must wait six months after goods have cleared customs to buy previously authorized dollars. But the government has opted to default on these obligations, too, leaving importers with a lot of useless local currency. For a while, credit from foreign suppliers and headquarters made up for the lack of access to foreign currency; but, given mounting arrears and massive devaluations, credit has dried up.

Felix Salmon likes their way of thinking about defaults, which squares with his own formulation of last year’s US sequester:

America eventually cured its default, and never graduated to defaulting on Treasury bonds. But Venezuela’s problems are harder to fix. And at some point, it simply won’t make sense to spend desperately-needed billions on foreign bondholders any more.

Indeed, if you ask Ricardo Hausmann, he’ll tell you that not only is Venezuela there already, but that even the technocrats IMF would recommend a sovereign bond default at this point. For all that it’s embarrassing and politically perilous for any government to default on its sovereign debt, then, I suspect that a fully-fledged default in Venezuela is now only a matter of time. Right now bondholders are probably safe, or safe-ish. But if and when Citgo is sold, alongside Venezuela’s other foreign holdings, I can’t imagine that the country will continue to pay its coupons in full. Indeed, Venezuela owes it to its citizens not to.

Harold Trinkunas considers the political implications:

Venezuela’s economic crisis has led to speculation that the 2015 legislative elections will be the next flashpoint in its ongoing domestic political conflict. Support for the government in Venezuela tracks closely with economic performance and domestic consumption (PPT), both of which have tanked in the past year. In fact, the Venezuelan government was only able to reverse negative public opinion trends before the December 2013 elections through a forced-sale of private inventories of consumer electronics and home appliances. Former planning minister Jorge Giordani admitted that the government had spent vast amounts in 2011 and 2012 to ensure the re-election of Hugo Chavez in 2013. Current economic indicators do not bode well for the regime’s electoral prospects, and the Maduro administration lacks the financial reserves to use public spending to increase domestic consumption next year. Importantly, this is not a regime that has reacted well to losing elections in the past.

And Juan Nagel zooms in on the country’s collapsing healthcare system:

Venezuela imports most of its medicines. There is a local drug manufacturing industry, but they do little research and simply manufacture medicine using imported raw material. The country’s cash shortage is throwing a wrench in that process. As one drug manufacturer explained, “I have a backlog of requests for currency that have not been approved, and without [currency] I cannot import the raw material I need. When I manage to get a shipment of medicine out, much of it ends up in the black market.” The Central Bank said in March of this year that 50 percent of drugs are missing from the shelves. It has since stopped publishing the data.

Due to the country’s overbearing price controls, there is a thriving black market for Venezuelan drugs. A fraction of the country’s drugs ends up in neighboring countries, where they fetch market prices. Unsurprisingly, Venezuelans have started bartering drugs on Twitter and other social media.