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Opinion and Analysis: Economy

Default: A Self-Defense Measure

What's going on with the Venezuelan economy? What are the challenges the Venezuelan government and its people face ahead of looming deadlines for colossal international debt payments? Venezuelanalysis invites readers to engage in this serious debate concerning the Venezuelan economy in this two part series.

Last week, we shared economist Victor Alvarez's analysis on the Venezuelan economic conundrum. Alvarez voiced his doubts about placing a moratorium on external debt in "What Happens if Venezuela Doesn't Pay its Foreign Debt?" and emphasized the need for a public auditing process.

Meanwhile, Carlos Carcione of Marea Socialista offers a differing opinion as he advocates for the country to default on its debt and prioritize resources toward social spending. The following is a translated interview with Carcione in Supesto Negado highlighting other areas for our consideration regarding Venezuela's economic crisis.  

What would be the consequences of Venezuela not paying its debt?

The crisis merits a real emergency measure: in order to resolve the food and medicine crisis, the essential measure is to suspend the payment of debt. If external debt payments continue at the current rate– which according to President Maduro amounts to USD $30 billion between 2015 and 2016– the country is going to go into disorderly default due to a lack of dollars. From an economic point of view, it’s best to inform the international markets [of Venezuela’s inability to pay] and call for discussions with bondholders, because otherwise, there will inevitably be a default, there’s no way to resolve it.

However much the price of oil rises, you are still choosing between eating and paying the debt, and that has a limit, because the population is going to resist. There are many myths about what would be the repercussions in terms of international capital’s treatment of the country. Well I can say that at the end of the ‘80s Mexico suspended debt payments and nothing happened. Argentina in 2001– which had up until now 15 years of suspended debt payments– undertook a restructuring of this debt and nothing happened. One time, an Argentine frigate was detained in a port in South Africa, but nothing happened, not even to Argentine exports.

The creditors know that it is easier to collect from countries that are in situations like these if there is a relief period of non-payment in order for the economy to recover. The international experience indicates this…even a Nobel Prize winner, a capitalist economist like [Joseph] Stiglitz recommends– even cites the example of Russia when it suspended payments on its debt– that countries in a situation like ours [should] suspend debt payments, not pay.

So it’s a self-defense measure on the part of the country, and later everything it can be re-discussed, beyond the fact that we at the Marea Socialista research team view the debt as illegitimate, which would have to be investigated, just as capital flight has to be investigated with a public audit, etc. But, independently of this, in order to escape the emergency we are in, the suspension of payments is an unavoidable step. The other step is the promotion of an emergency UNASUR fund for [imports of] food, medicine, etc. And thirdly, if the Venezuelan capital deposited in the exterior cannot be repatriated, that at least it should be taxed. There are 300 billion dollars according to President Maduro that were drained from the country, that have not left legitimately and are deposited in private Venezuelan accounts abroad that don’t pay any taxes, on top of the fact that the overwhelming majority of them are illegitimate. According to our investigations, at least USD $259 billion of this capital is illegitimate.

And is proposing the non-payment of the debt giving ground to a strategy of economic destabilization, deepening it?

Venezuela can’t pay the debt, it’s a fact. It’s not a false assumption, it’s an empirical fact that default is going to happen. Either it will go down in a disorderly manner or it’s its going to happen under pressure from the social situation of great discontent caused by lack of food or medicine.

So, the markets are prepared for this to happen. It’s another thing if you want to supplant the payment with new financial instruments– as they are trying to do with the Mining Arc or with oil reserves– but even the bond rating agencies calculate a high risk that Venezuela will not pay its debt. By their estimates, Venezuela will reach a point that it won’t be able to pay the debt, so they calculate interest rates in order to collect with anticipation. It’s all a matter of declaring in a clear way– regardless of what the international markets understand– that we are not paying and we begin to surmount the crisis.

Why do you think that the government does not propose [default] openly?

Because it’s trying not to reach the point of default, because there’s a logic of believing that if you uphold your bargain with these capitals, the international pressure will lessen, but the international pressure is already there. The other thing you have to look at is who are these international bondholders. For example, who are the international banks that own Citigroup, Bank of America, etc., who are the players in this game.

It’s proven that Francisco Rodriguez, the person in charge of Bank of America [in the Andes] had a seat at the BCV [Venezuelan Central Bank] next to [BCV President] Nelson Merentes. So you have to look at what is the intention. The fulfillment of debt payments, which is to say “we are payers”, is to remove an issue of debate from the international agenda. The same thing with resolidifying relations with the United States: that does mean that Obama isn’t going to sign another decree declaring Venezuela an extraordinary threat.  I think this policy of trying to please [the creditors] or of partially eliminating obstacles is creating a situation where the international pressure adds to the internal pressure, because there is internal pressure from the very social base of Chavismo. [The government] is in an impossible situation.

So I think the policy is flawed. I’ll say it again: for every ten cases of countries in economic crisis defaulting on debt payments, you’ll find one in which there have been sanctions, and the rest no.

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Translated by Venezuelanalysis.