Not often does a Wall Street Journal headline appear to be written by hardline Marxists, but that is what happened on Feb. 24: “In Decaying Venezuela, Debts Get Repaid: The country, struggling with an economy in crisis, appears set to hand over $1.5 billion for its debt payment to foreign bondholders.”
A February 29 headline for CNBC.com was even more indignant: “Venezuela is making 'surreal, suicidal' debt payments.”
As you might guess, the headlines are not really driven by outrage that bondholders were paid. These are frustrated analysts venting their anger, not irate Marxists. With rare exceptions, corporate journalists are as likely to be hostile toward elite bondholders as Hillary Clinton is toward Goldman Sachs. I am not saying that Marxists always urge default without properly analyzing the consequences - just observing that many reporters are willing to sound like the sworn enemies of Capital when Venezuela defies their predictions and pays bondholders.
Despite several years of very strong GDP growth and very low levels of debt (which did not prevent claims of looming bankruptcy being made by some reporters several years ago), Venezuela’s economy began to struggle shortly before Hugo Chavez’s death in March of 2013. On Sept. 5, 2014, an article by two opposition economists asked “will it?” (Venezuela’s government) make payments due to bondholders in October of that year. The article was immediately cited by the New York Times editors, among many others. Claims that Venezuela was on the brink of defaulting have been all over the international media ever since. When the default hype began, oil prices, on which Venezuela depends for almost all its foreign exchange, were over $90 a barrel and absolutely nobody – certainly nobody whom the media noticed – was predicting a deep and sustained collapse in oil prices. Three months after the default hype started, oil prices had dropped by about half. They have now fallen to about 70 percent of where they were in early September 2014, but no default has taken place.
In a balanced media, the people who have bet on default since September 2014 – elite investors, various economists and credit rating agencies – would have suffered a huge blow to their credibility. People who consistently debunked that point of view, on the other hand, would be listened to far more closely. One such person is Francisco Rodriguez of the Bank of America Merrill Lynch, the kind of outfit that corporate journalists would generally take seriously.
Rodriguez just published a commentary stating that “the market has underestimated the country's capacity to reduce imports as well as its willingness to use its stock of external and internal assets to avoid defaulting. In fact, in January of last year, markets were assigning a 68 percent probability to default within a year.”
Actually, the bursting of enormous housing bubbles in many rich countries, especially the U.S., that crashed the global economy in 2008 should have taught anyone, regardless of ideology, not to blindly trust markets, much less credit rating agencies. The fact that academic studies have been written trying to explain why the massive U.S. housing bubble was missed by the vast majority of “experts” exposes the level of groupthink in the sources used by corporate journalists.
Returning to Rodriguez’s latest commentary on Venezuela’s finances, he contrasted Venezuela with Ecuador which strategically defaulted in 2008 on a great deal of foreign debt that it ruled to have been illegally contracted. Ecuador’s default was very successful. Ecuadorian crude dropped in price after default as a kind of risk premium was imposed by its customers, but the price of its crude recovered after Ecuador bought back its debt at greatly reduced prices. “The buyback was facilitated,” Rodriguez observes, “by the lack of external attachable assets and the fact that the defaulted debt was sovereign and not of the state-owned oil company. Were Venezuelan oil prices to experience a similar drop today, the country would forgo $5.4 billion in export revenue a year. In other words, it is not clear that Venezuela's cash-flow problem is made any easier by defaulting.”
That demolishes the “moral” case for default which has been angrily made by some government critics. As for the country’s capacity to pay, Rodriguez wrote “as of the start of this year, the country had $52 billion in external assets susceptible of sale or securitization, allowing it to continue to cover a sizable financing gap even under the extreme assumption that new financing is not viable.”
His analysis also addresses the question of import levels. Given shortages for which the government has already paid a steep political price, how can it divert any more dollars away from imports to pay bondholders? It can do so scrapping its fixed exchange rate system and many of its price controls. In a debate last year, Rodriguez estimate that dollars lost to currency speculation cost about 10 percent of GDP per year. In other words, billions of dollars officially allocated for imports are not actually making imports available to consumers.
Wouldn’t abandoning these policies be a capitulation to neoliberalism – the policies of upward wealth distribution and punishment of the poor that plagued Latin America from 1980 to 2000? No, it would simply be a transition away from a few very inefficient and costly ways the state has intervened in the economy. There more much more effective ways for the state to intervene in the economy to reduce poverty and inequality.
Mark Weisbrot spelled this out with excellent clarity in a Fortune magazine article – a rare departure from what international audiences get to read. He suggests the Venezuelan government implement a system like food stamps in the U.S. to “make living affordable” for the most vulnerable. Establishing that will allow it to recover the massive amount of revenue it loses through its current exchange rate system and other price controls but without hurting the poor. Of course this is easier said than done by a government facing collapsed oil process and unscrupulous opponents at home and abroad. However, default does not makes sense in Venezuela’s case, nor do the reporters who constantly bring it up really seem to care.