“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”

Bloomberg Businessweek (North America) - - CONTENTS - Se­bas­tian Boyd

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 GraisTar­gow, 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 Venezue­lan debt pay­ments com­ing due through 2020

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