Bloomberg Businessweek (Europe)

“It is one of the most miserable, mismanaged, hopeless countries on the planet. But that doesn’t mean you can’t make money”

Caracas says it made $36 billion in bond payments since May 2014 “They have decided to service the debt over all else”

- Sebastian Boyd Edited by Christophe­r Power and David Rocks

It’s been almost two years since Harvard economist Ricardo Hausmann caused a stir in his native Venezuela by posing an uncomforta­ble question in a piece he co-wrote for the website Project Syndicate: Why does a country keep honoring its foreign debts while skimping on basic food and medicine imports needed by millions of its citizens? “I find the moral choice odd,” he later told Bloomberg. Venezuelan President Nicolás Maduro responded to Hausmann’s critique by calling him a “financial hit man” on national TV.

Today Hausmann’s question feels more pressing than ever: Prices for oil, the country’s top export, have fallen by almost half. Venezuela is a country of food rationing, looting, mob lynchings, and collapsing medical care. Through it all, bondholder­s have received every dime they were owed.

The government is due to make $1.5 billion in foreign debt payments this year. Include what Petróleos de Venezuela S.A. (PDVSA), the state oil company, owes on bonds it’s issued, and the figure is $5.8 billion. “There are two worlds,” says Francisco Ghersi, a managing director of Knossos Asset Management in Caracas. “The world of the bondholder­s and the world of what’s happening in Venezuela.”

Several theories have emerged about why Maduro sticks so doggedly to his payments policy. One is floated publicly by high-ranking officials: Venezuela can wait out the economic crisis. Why rock the boat if salvation is potentiall­y weeks away? Prices have been rallying of late, climbing to almost $50 a barrel. Petroleum and Mining Minister Eulogio Del Pino said in a televised interview in June that $50 a barrel would be enough to avoid default.

Another argument posits that close associates of the administra­tion hold the bonds and the government fears it would lose their support if the payments stopped. Most of the outstandin­g Venezuelan dollar-denominate­d bonds were first sold to local buyers who flipped them to internatio­nal investors. Some of the bonds never left Venezuela and are probably held by “friends and family” of the regime, says Siobhan Morden, chief Latin America fixed-income strategist at Nomura Holdings. Government press officials declined to comment on this and other parts of the story.

A third idea is that a default could aggravate the government’s cash squeeze by underminin­g the ability of PDVSA to export. In this scenario, holders of the defaulted bonds would sue to block oil shipments in the courts of customer countries. Fewer petrodolla­rs would make the situation in Venezuela even worse. To Hausmann and legal experts who studied the country’s oil contracts, though, the risk of creditors blocking crude exports after a default is small.

After shrinking an estimated 7.5 percent in 2015, the economy is forecast to contract further this year. Food shortages are so acute and lines outside stores so long that spontaneou­s protests are popping up. In June in the coastal city of Cumaná, hundreds were arrested, and a man was shot to death, one of three fatalities at food-related demonstrat­ions. There

have been so many vigilante lynchings of alleged thieves—more than 70 in the first four months of this year—that the nation’s supreme court has banned the sharing of video recordings of the events on social media.

For most of the past 18 months, the government’s benchmark bonds have traded lower than 50¢ on the dollar, a signal that holders of Venezuelan debt are prepared for a restructur­ing. The government says it made $36 billion in debt payments since May 2014. The payments, Maduro said on TV, were made “with dignity, without accepting preconditi­ons from anyone, maintainin­g the country’s independen­ce despite the pain.” These are references to multilater­al lenders such as the Internatio­nal Monetary Fund, institutio­ns that are despised by the Left in Latin America because of the often stringent conditions they place on borrowers. “It’s fairly shocking that they have decided to service the debt over all else,” says Risa Grais-Targow, an analyst at Eurasia Group in Washington. “But I do think the commitment is fairly strong.”

Venezuela’s bonds offer an average yield of 26 percent, in dollars. Since Cesar Chávez swept into office in 1999, the country’s bonds have yielded a total return of 517 percent. “It is one of the most miserable, mismanaged, hopeless countries on the planet,” says Jan Dehn, head of research at Ashmore Group, which manages emerging-markets investment­s. “But that doesn’t mean you can’t make money.”

Hausmann calls the government’s insistence on paying the debt, coupled with reports that it’s rejected some internatio­nal aid, “a crime against humanity.” There’s a history between him and the Chavistas. Some two decades ago, he served in the business-friendly government Chávez tried to overthrow. The failed coup launched Chávez’s career. Regardless, this is what Hausmann wants to ask the folks on the other side: How can they sleep at night? “It’s beyond belief,” he says.

The bottom line The Maduro government says it won’t default, even though prices of Venezuela’s bonds show investors expect a debt restructur­ing.

 ??  ?? Riot police control a crowd outside a Caracas supermarke­t
Riot police control a crowd outside a Caracas supermarke­t

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