Opinion and Analysis: Economy
What Happens if Venezuela Doesn't Pay its Foreign Debt?
In Venezuela, 96% of foreign currency earnings come from oil. With the collapse of prices, this income has fallen to 75%. And this has repercussions for the capacity to pay. The country no longer has the means which once allowed it to contract and continue to pay a growing foreign debt. That margin for manoeuvrability is now exhausted and today the situation is increasingly difficult, to the point where international reserves are rapidly being liquidated and monetary gold swaps being carried out.
The boom in the prices of oil and raw materials provided abundant financial resources which were not duly taken advantage of in order to support a Latin American monetary agreement that would protect the economies in the region. The people gave their governments a mandate to develop a new international financial framework, which unending meetings amongst bureaucrats failed to deliver. There was no greater articulation between the central banks of each country, nor was there an advancement in the creation of the much promised Monetary Fund of the South and the Bank of the South. In this way, extractivist countries which are today affected by the collapse in the prices of oil and raw materials find no alternatives, and are thinking about knocking on doors of the International Monetary Fund and World Bank to gain access to the resources they need to alleviate their problems in balancing their payments.
Restructuration or moratorium?
The gravity of the foreign debt is being distorted by calculations which do not reflect the true situation of the country. It is believed that the debt is manageable because the conversion of GDP in bolivars to dollars is being done at the Dipro rate of barely 10 bolivars to the dollar. Dividing a contracted GDP by such a low rate obviously leads to an overestimation of the value of the GDP and, as a result, the weight of foreign debt as a percentage of GDP is being underestimated and erroneously looks manageable.
Another erroneous idea regarding Venezuela’s capacity to pay emerges from the belief that oil prices will recover through control over production in the OPEC (The Organization of the Petroleum Exporting Countries). The failed attempts to cut production to protect prices leaves little room for recovering liquified foreign currency this way.
Another false hope is the belief that allied countries will come to our aid. Although China has operated as a moneylender of last resort, the magnitude of the funds involved make it unlikely that it will continue to bet on Venezuela, even in the extreme event of accepting that what remains of the USD $5 billion(borrowed) goes towards paying the foreign debt to the detriment of the Chinese Fund* projects.
What is certain is that international reserves have imploded to USD $12 billion and the country cannot go on as it is. Faced with the collapse in oil prices and the acute scarcity of foreign currency, which simultaneously prevents covering import needs, paying the foreign debt and the compensation cases ratified by ICSID (International Center for Settlement of Investment Disputes), different suggestions can be heard that range from liberating the exchange rate to a unilateral moratorium on the foreign debt via the re-structuring of payments.
Those that propose a moratorium appeal to the Nobel Prize winning economist, Joseph Stiglitz, who argues that when a country imposes a reduction in its debts on creditors and re-orientates those funds towards an expansionary fiscal policy, it produces positive results: “there is little proof that gives weight to the idea that ceasing payments leads to a long period of exclusion from accessing financial markets. Russia could ask to borrow money again from the financial markets two years after the ceasing of payments was unilaterally decreed, without previous consultation with creditors,” assures the man who was also chief economic adviser to Bill Clinton.
Those that oppose a moratorium suggest that the consequences of not paying would be very expensive for the Republic and for (state oil company) PDVSA. Both have strategic assets abroad and their seizure would mean great patrimonial damage and the paralysation of crude oil exports. PDVSA has 44 oil tankers, 13 refineries and bank accounts which would be susceptible to freezing and an embargo. It would be very costly to stop paying, even when this commitment entails a high political cost for the government.
The margin of manoeuvrability to free up resources and to avoid a default includes repurchasing Venezuelan debt to alleviate payment on capital and interest, reformulating Petrocaribe** to charge in one year what is being charged in twenty, substituting imports for government purchases favouring national production, rescheduling payments in dollars for infrastructure works that have been contracted to China, Brazil, Iran, etc., re-profiling due dates in 2016 and 2017, substituting the bonds which are about to expire for new long term issues, removing from state hands enterprises that have been kidnapped by bureaucracy and corruption, reduce military spending, and improving the image of Venezuela in financial markets by correcting the overstatement of the country’s risk.
Venezuela’s situation is not comparable to that which Argentina suffered, a country which ceased payments for more than ten years. Beyond political and economic contingencies, creditors perceive that a country with the biggest oil reserves in the world and colossal gold, diamond, coltan, and other strategic mineral reserves, will not suffer a solvency crisis in the long term, but rather that it is experiencing a temporary liquidity problem. That’s why Venezuela’s range of creditors is very stable and has not acted quickly to sell off the debt– 99.6% of the titles remain in their hands. They trust that once the collapse of oil prices is overcome, the risk of default will be low. How to explain the fact, then, that a country that does not possess a default record, which has a margin of manoeuvrability, and the potential for sufficient income to cover its commitments, is being so badly treated by risk calculators?
Audit on foreign debt
Just as what took place at the outset of Venezuelan rentier capitalism, in socialist neo-rentierism the original accumulation of capital on the part of the Bolibourgeoisie was founded on the robbery of abundant oil rent. An example: the embezzlement of more than 20 billion dollars in just one year that was denounced by former minister, Jorge Giordani, the ex-president of Venezuela’s Central Bank (BCV), Edmeé Betancourt, and the ex-president of the Financial Committee of the National Assembly, Ricardo Sanguino. This colossal embezzlement proves that the capacity for auditing and controlling the entities of the state is brimming with collusion between businesspeople and corrupt public servants who collude to defraud the nation. The Public Attorney’s Office and the National Audit Office barely have the capacity to investigate a few isolated cases, without being able to face the magnitude of the problem head on.
In response to this institutional weakness in the Venezuelan state, the Platform for Public and Citizen Auditing has emerged, backed up by the rights consecrated in the Revolutionary Constitution of the Bolivarian Republic of Venezuelan and the Organic Law of Social Auditing. This initiative puts forward the idea of an audit on the allocation of preferential dollars, the contracting and management of public debt and, in general, the way in which public finances are administered.
Clarifying why the country with the greatest oil reserves in the world ended up at the gates of a humanitarian crisis involves auditing public and private enterprises, transnational companies and banking institutions, which could be involved in capital flight through the crimes of: fictitious foreign debt, over-invoicing on imports, under-invoicing on exports, triangulating with fake businesses and other invented mechanisms for capturing the greatest slice of the oil wealth.
That’s why the amount of foreign debt that the country must finally pay should be the result of a public auditing process, thus avoiding that these frauds against the nation are legalised, through a process of restructuring and reprogramming payments. The viability of a citizens’ audit involves transparency and an opening-up of the public institutions that have the pertinent information, in order to find out what the real situation is in terms of foreign currency income, the amount of foreign reserves, as well as the commercial and financial obligations that the BCV must face.
Likewise, it is also necessary to have transparent and timely information to know in real time time: how much is coming into the country and how much is going out on a daily basis? What is foreign currency income from oil rent being used for? Who are the beneficiaries of the allocation of preferential dollars? Only in this way will it be possible to investigate and know the true extent of the fraud, to recover the maximum resources possible and sanction those who are responsible.
*A joint investment fund between the Venezuelan and Chinese government.
** A subsidised oil programme in the Caribbean sponsored by the Venezuelan government.
Translated by Venezuelanalysis.
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