Race Over: Why Venezuela Should Default

Supposedly paying Lotus $40m/year for a non-competitive drive is only the start of Venezuela's folly.

Amidst the wider economic turbulence worldwide, among the very first to get hit are energy exporters with very high production costs for obvious reasons. Dependence on energy revenues amidst an oil rout ensures that state coffers are being depleted--especially when your breakeven price is high. The poster child for national mismanagement--dwindling production, inefficient technology, and politicization of oil funds is, of course, Venezuela's state-owned oil companny PDVSA which features all these things and worse. For a supposedly socialist nation, the ultimate bourgeois folly is sponsoring F1 driver Pastor Maldonaldo at the enfeebled Lotus which currently lies 8th of 11 in the constructors standings. In the pit paddock, ol' Pastor has a reputation for being a nutter, and the leader who bankrolls him is no different.

Economists Carmen Reinhart and Ken Rogoff wading into the fray has sparked another round of debate on Venezuela's fate. Their colleague, Venezuela-born Harvard economist Ricardo Hausmann--he of "deficits don't matter since dark matter makes US deficit disappear" infamy--actually seems to offer a less fantastical analysis of his home country. Apparently, deficits seem to matter in Venezuela, or he was at least chastened by the global financial crisis that came after his "dark matter" flight of fancy. Don't ask me to explain; it's a Venezuelan thang. Anyway, here are Hausmann's colleagues coming to his defense:

It is unclear whether Maduro, who called for Venezuela’s authorities to take unspecified “action” against Hausmann and Santos (both Venezuelan citizens), was more offended by the suggestion that his government should default on external debt, or by the authors’ list of all the other ways it has already defaulted. These include the government’s $3.5 billion unpaid bill for pharmaceutical imports, payment arrears of more than $2 billion for food, and nearly $4 billion owed to airline companies. Oil production has more than halved since 1997, in no small part because the state-owned oil company has repeatedly defaulted on suppliers and joint-venture partners.

Predicting a Venezuelan default in the near future and actually encouraging this course of action has not endeared Hausmann to the bus driver taking Venezuela down the highway to hell, Nicolas Maduro:

The suggestion that the country stop servicing its bonds comes a month after Harvard colleagues Ricardo Hausmann and Miguel Angel Santos wrote that Venezuela should consider defaulting given that it was piling up arrears to importers. Venezuela owes about $21 billion to domestic companies and airlines, according to Caracas-based consultancy Ecoanalitica...

“People are beginning to see that a sensible strategy for the government is to default,” Joaquin Almeyra, a Miami-based bond trader at Bulltick Capital Markets, said in an e-mailed response to questions. “And oil below $90 complicates things.”  

If you like financial adventure, buy some Venezuelan sovereign debt:

Venezuelan debt is the riskiest in the world, yielding 16.07 percentage points more than Treasuries, according to datacompiled by JPMorgan Chase & Co. The cost to insure the country’s bonds against default with credit-default swaps is also the highest for any government globally. “Given that the government is defaulting in numerous ways on its domestic residents already, the historical cross-country probability of an external default is close to” 100 percent, Reinhart and Rogoff wrote in their article. 

What is Maduro's retort to Hausmann? His predictably feeble-minded response is to dub the Harvard economist a financial "hit man" after a really bad conspiracy theory book. But alas, the day of reckoning is nigh since crammed into the end of 2015 is a logjam of payment dates that should deliver Venezuela to the gates of insolvency:

President Nicolas Maduro dubbed Hausmann a “financial hit man” and “outlaw” and instructed the attorney general and public prosecutor to take “actions” against the Venezuelan-born professor for seeking to destabilize the country...
 
There is little risk of an immediate default in Venezuela, Sebastian Briozzo, director of sovereign ratings at Standard and Poor’s, said today in an interview at Bloomberg headquarters in New York. Last month, the ratings company lowered Venezuela’s credit rating to CCC+, which implies at least a 50 percent chance of default over the next two years.

“Once we get closer to the end of next year, the situation could become more difficult,” Briozzo said. The government is prioritizing debt payments because it needs foreign investment to expand oil production, he said. 

I do not quite understand the logic of the leftist nutter Maduro. Why is he out to attract foreign investment from foreigners in hopes of boosting production? Can't the great socialist people of Venezuela be inspired by the great Simon Bolivar to sort the matter out for themselves instead of relying on the capitalist imperialists? Moreover, if he really wanted to stick it to these dumb foreigners who think they know better, he should screw them over ASAP by paying them nothing, nada, zip, zilch, Argentina style.

Viva la revolucion! Viva Nicolas Maduro! Viva Pastor Maldonaldo too while we're at it! If nothing else, a guy who recklessly drives into other cars week in and week out is nothing if not an excellent representative for Venezuela's crash wreck of an economy.