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.

Ain’t No Party Like A Military Party

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Venezuela’s supreme court decided last week that military participation in pro-government rallies was not only permissible, but actually a good thing. Juan Nagel decries the ruling for “dramatically eroding what is left of democracy, bringing Venezuela back to its nineteenth-century roots when warlords ruled the land”:

The Venezuelan Constitution clearly establishes the military as a non-partisan entity. According to Articles 328 and 330, active service members “have a right to vote,” but they cannot participate in “acts of propaganda or political partisanship, and they cannot proselytize.” This, apparently, is not clear enough for Venezuela’s highest court. In complete opposition to the text, the court ruled that active military participation in partisan acts “is a high water-mark for democratic participation.” The ruling goes on to hail the use of the military in partisan activities as “a progressive act geared toward the consolidation of civilian-military union.” … The ruling basically sets into law what has been a fact in chavista Venezuela: that the military is the armed faction of the governing party.

He contextualizes the court’s WAR IS PEACE ploy to show how dangerous it really is:

Keeping the military impartial was an important part of Venezuela’s democracy. The military guards all elections in Venezuela, doing everything from manning voting centers to handling voting material. They are also charged with ensuring safety in and around voting centers. Now that they are part of the governing party, how can anyone in the opposition be sure that results will be respected? Asking the military to take care of elections is like asking your dog to guard a stash of freshly cooked bacon.

That may be the only way president Nicolás Maduro can win an election at this point, considering how the country is falling apart:

[R]ampant scarcities of food and basic goods, sky-high inflation, and staggering crime rates have chipped away at Maduro’s popularity, reducing them to record lows. In early February, a rash of street protests and barricades paralyzed the nation, and were violently suppressed by state authorities in a series of crackdowns that saw several notable opposition leaders incarcerated. The resulting negative publicity led even previously supportive international media outlets, such as the The Guardian to become more critical, and when Hollywood stars began chiming in against his government, the 2014 Academy Awards were pulled from the Venezuelan television lineup for the first time in 39 years.

And now this: in the middle of a triumphalist speech for “national journalists day,” broadcast by law on every Venezuelan television and radio station, the lights suddenly went out on Maduro—and on much of the country. Much of Caracas, and areas in nearly all of Venezuela’s other 22 states was affected the country’s aging and poorly maintained power grid struggled to get back online.

(Photo: Venezuelan acting president Nicolas Maduro (2nd-L) and state governor Adam Chavez (L) receive military honors before heading for a campaign rally in the state of Barinas, Venezuela on March 30, 2013, ahead of the presidential election on April 14. By Juan Barreto/AFP/Getty Images)