Sunday, February 7, 2016

If a country was a de-facto concentration camp, could its guards be accused of economic crimes against humanity?

It states: “A mishmash of indiscriminate subsidies, prices and exchange controls, social programs, expropriations and grand larceny by official [and] the collapse in the oil price has exposed the Bolivarian Revolution as a monumental swindle…[and leading to] the supply of medicines fallen to a fifth of their normal level. Many pills are unavailable; patients die as a result…food queues at government stores grow longer by the week…Violent crime is out of control.”

So let me ask, if a country was a de facto concentration camp for many of its citizens who had no opportunities of leaving it, and the guards of the camp had behaved like what has been described above, including the fact that petrol is given away at less that 1/300th of the price of milk; should it not be possible to bring the guards in front of the International Criminal Court, accused of economic crimes against humanity?

And, if knowing the conditions in the concentration camp, financiers had anyhow, because of ultra-high interest rates, given the guards even more resources to waste, and to later be repaid by the prisoners, could not these participations in the bleeding be declared as having no value by that same International Criminal Court?

The world no doubt needs a Sovereign Debt Restructuring Mechanism but, if that is going to help the citizen-prisoners of the world, which it primarily should do, it must begin by making clear the difference between bona-fide normal credits and borrowings and odious credits and borrowings.

Saturday, February 6, 2016

Because of economic crimes against humanity, a Nuremberg type of tribunal needs to classify Venezuela’s public debts.
And there is little doubt of that many of those who were financing the Bolivarian Revolution, were totally aware of that the government was committing what could be deemed as economic crimes against humanity. 

And so the question now becomes, do we need a Nuremberg type of court to classify what are normal bona fide debts and what represent an odious participation in the ransacking of a country?

Monday, October 26, 2015

We must not allow vulture funds to be able to collect rotten odious credits

It would be irresponsible of anyone knowledgable of its economy not to be thinking about the possibility that Venezuela needs to talk with the IMF, to soon begin a process of renegotiating its debt, as well as PDVSA's, which both seem imposible to duly serve in the short term, if the country is not to suffer biafran hunger.

But during the week the Financial Times columnist, Martin Wolf, in an article entitled "Resist Russian blackmail over Ukraine's debt", recalled how the influences of some sovereign creditors could block the constructive actions of the IMF to reach a solution acceptable.

In this regard it may be desirable to first pass before the International Criminal Court in The Hague. I say this because the massive waste of economic resources in a country, for reasons of incompetence, corruption or simply ideological, notoriously verifiable, should qualify as an economic crime against humanity. And the financing of an economic crime against humanity, should not count on any institutional support, like of the IMF type.

Currently there is also much discussion in the world about the need to establish a mechanism for Sovereign Debt Restructuring (SDRM). I agree with this need but, for the results of an SDRM to be acceptable to us citizens, it must:

Remove all incentives that may encourage governments to contract excessive debts.

And make sure it does not provide any benefit, much rather the contrary, to any debt that could be considered as derived from an odious credit.

A loan granted with a lack of transparency, which might be involved in an act of corruption, or that it was originally granted when it was clear that the resulting debt was not sustainable, and therefore it was purely of speculative nature, should not receive the same treatment by the SDRM, as a regular loan to the public sector awarded transparently, and when there were no major doubts about the ability to serve the sovereign credit.

To identify the speculative nature of a loan, one could use for example that the interest rate exceeds 5 percent the rate charged to an AAA rated sovereign.

We must never forget that the best SDRM is the one that reduces the need for it, and thus lowers the risk premiums to be paid to the sovereign.

And we read that investment funds dedicated to capitalize on the opportunities offered by troubled loans, so-called vulture funds, are growing much. These, an even when we like with vultures and buzzards do not like them much, they do in some cases provide important liquidity to the financial and credit markets... and should be duly rewarded for it.

But, since Venezuela already faces major challenges canceling debts duly owed, the last thing we need is that vulture funds also end up collecting rotten credits from us.

Translated from Noticiero Digital

Monday, September 8, 2014

An odious method of contracting sovereign debt in a non-transparent way that needs to be banned

Ricardo Hausmann and Miguel Angel Santos, in their “Should Venezuela default?” refer to a “$5 billion private placement of ten-year bonds with a 6% coupon, it effectively had to give a 40% discount, leaving it with barely $3 billion”

That in cost represents approximately the same as a $3 billion ten-year bond issue with a 13.5% coupon. 

That type of financing of a sovereign should be prohibited for two reasons: 

First, that is, as you can understand, especially when the exact placement price of the issue is rarely reported, a completely non-transparent way of financing. 

Second, in the 2nd alternative, any new government who could obtain access to better credit terms, could much easier offer to repay the $3 billion issue, and thereby free the nation from those usury rates. As is, unless it enters into a default, it has to repay the full usury interests that are hidden away in the repayment of the $ 2bn in principal not received. 

And I would also like to know… who arranged that private placement, and who bought it… so that I could express my contempt for it. Do they not know that Human Right’s Watch has clearly established that in Venezuela human rights are being violated? I mean where does the limit go? Would it be right to buy bonds to finance the building of concentration camps... if the price, the risk premium, is right?

If financiers need credit ratings to base their decisions on, we citizens need governance ratings and ethic ratings to base the permission for our sovereigns to take on debt.

Also… speculative investors should not have the right in any restructuring to have the cake and eat it too, meaning collecting their high-risk premiums and the full principal.

Friday, September 5, 2014

A sovereign debt resolution mechanism should look at how sovereign credits originate too

Joseph Stiglitz in company of many others has recently sent a letter to United Nation’s Secretary General Ban Ki-moon, requesting him to support the implementation of a Convention for the restructuring of sovereign debt.

Of course one cannot but wish for orderly sovereign debt resolution mechanisms, but one needs always to fear the law of unintended consequences… like that the expected benefits of any such mechanism, would just end up being transferred as additional costs to other sovereign borrowers.

Nor would one want lenders who lent to the sovereign at low rates, or acquired sovereign debt when no repayment problems were envisaged, bona fide lenders, to receive the same treatment as those lenders who lending at high speculative rates, perhaps even helped to create the crisis that demands a debt resolution.

Thinking along these lines and reflecting on how often we have seen sovereign debts contracted in an unsustainable ways, perhaps in order to benefit a selected few, it should be clear that any debt resolution mechanism must simultaneously consider the origination of sovereign credits. And, in its simplest form, create a clear distinction between bona fide and speculative sovereign debts.

And, nothing discloses the frontiers between bona fide and speculative debts like the risk premiums charged or implied in the markets. And in this respect, for a starter, I would like to put forward the following definition.

Any sovereign debt that reflects a risk premium that exceeds for instance in 4 percent the lowest interest rate paid for similar debt by other sovereigns, the speculative threshold rate, STR, should be classified as speculative sovereign debt, SSD.

And in the case of a restructuring of a sovereign debt, I propose that any creditor who entered in possession of his credit in conditions that would deem it to be a SSD, should have all interest received in excess of the allowed STR, automatically deducted from the principal.

The basic principle that lies behind this is that if, and only if, a sovereign debt is restructured, a speculative creditor should not have the right to eat the cake and have it too… which translated means should not have the right to obtain the high risk-premiums and 100 percent of the capital too.

And, in presenting this proposal, I am not acting as a creditor, nor as a sovereign borrower, but only as a citizen who wants to avoid governments to mortgage our future on unreasonable terms.

There is currently way too much thinking of what to do if a sovereign credit must be restructured, compared with the thinking of how to avoid unreasonable sovereign debt… or in other words too much talking about odious debts, and too little about odious credit and odious borrowings.

Why for instance is there so much insistence in credit-repayment worthiness ratings, and almost none in ethic ratings which could better show credit-receiving worthiness? 

Thursday, August 28, 2014

Should the collection of very high risk premiums on sovereign debt be allowed to go hand in hand with the collection of 100% of the principal?

I have not discussed this with anyone but myself… so I do not hold myself too much to this my own opinion… and so it can change. 

I am and have always been concerned with sovereign over indebtedness, as that affects foremost the citizens of the over-indebted country's own possibilities to take on debt… to realize their own dreams and not the politicians’ dreams... and so I have been toying around with many ideas. Among these:

If a lender gives a sovereign a loan at an interest rate that exceeds for instance 3% what the "safest" sovereign has to pay for a loan, “the overcompensation”, then, if the sovereign runs into trouble, and declares default, should it not immediately be able to apply all overcompensation to the capital owed?

Why? Because frankly I feel that the lender to a sovereign should not be able to eat his cake and have it too. If he charges a sovereign higher interest rates because of its riskiness, well then he should not be able to expect to fully collect 100% of the principal.

Does this make some sense? 


Thursday, August 29, 2013

Who did you vote for?

Someone asked me who I would vote for as President of the USA among the current republican and democrat candidate. I replied that as foreigner I have no need to torture myself trying to choose, and so I would not answer it. Nonetheless that got me thinking on that indeed your record as a voter should be made public because, as is, it is too easy for the voter to distance himself from his responsibility of a poor choice.

Coming as I do from a country like Venezuela and where the votes were made public and people were fired from their jobs just because they opposed Hugo Chávez, obviously your vote needs to be classified material, for a period, but, sooner or later, you should have to face your grandchild question "Grandpa, did you really vote this way? What were you thinking of?

PS. Just in case, I never ever voted for Chávez, and that is obviously why I dare to make this suggestion. In fact I have a spotless record. I have never voted for a candidate that was elected president.

Credit should be a one sided affair

There is nothing wrong to take credit whenever someone is buying a lot of your products with his income but, if the other one is also buying from you taking credit then, sooner or later, shit will hit the fan.

Wednesday, April 17, 2013

Should not lending to a sovereign be the exclusive prerogative of its citizens, of its taxpayers?

Financial conference after financial conference, the closer I am to believing that the financing of a sovereign, should be the exclusive prerogative of its citizens, those to whom a government should be fully and exclusively accountable to. 

Now if some foreigner or wants to finance a citizen or a corporation of a sovereign that is just great but if it goes behind the back of a sovereign’s citizens and gives credit to its government in easier terms than what the citizen thing it merits, that is probably going to end up very bad. 

For instance, what business had Cypriot banks lending to Greece and what business had the Greek government borrowing from Cyprus? Now both Greeks and Cypriots are suffering big time.

In other words, foreign creditors dilute the representation of citizens and taxpayers.

Tuesday, June 8, 2010

Wednesday, July 18, 2007

You should not give debt relief to "odious" debt

A letter to the Financial Times

Sir Alan Beattie in “Vultures unlikely allies in anti-graft cause” July 18 quotes Stephen Rand of the Jubilee Debt Campaign saying “Debt relief should never be used as a weapon of economic coercion by creditors” as implying that debt relief should be awarded even when governments are still corrupt.What is this? As a citizen of a country with a government that I consider quite corrupt, I do not like anyone giving it loans, debt relief or anything whatsoever. Frankly, before corruption is ended most of any debt relief given would just end up allowing these countries and governments addicted to debt, to hit the bars again.If the concept of odious debt is applicable in the sense that some debts should not have to be repaid if contracted in an illegitimate way, castigating the creditor, then the same concept should clearly also apply to the granting of any debt relief, punishing the debtor.

Friday, February 16, 2007

Vulture funds

A letter to the Financial Times
Sir, I write to you with respect to Alan Beattie´s “'Vulture fund' in Zambia debt case gain”, February 16. I might not like it too much if a vulture-fund-manager invited any of my daughters out to celebrate a killing in Zambia debt but, having said that, neither am I so sure that the world would be a better place without the vulture funds.

That some can find opportunities in buying uncollectible loans and squeeze fortunes out of them when others have decided to clean up their books, is just part of the circle of life, and part of the same market mechanism which signals how much, or how little, the loans are worth, since the price of a loan indicates the expectations of collecting on the loan and not the expectations of collecting on a “pardoned” loan. Yes, the vulture funds are into an ugly business, cleaning up among corpses, but, by their sheer presence, they might perhaps even help to reduce the number of corpses.

Most, or perhaps all of the scholar papers on the restructuring of sovereign debt, state as the explicit purpose of the whole exercise, that of enabling the countries to regain access to the international capital markets again (something like the torturer waking up his fainted victim) and so, if you really need to pick on one, you might also choose to do so at that moment in the circle when the new born debt-overhang-ridden countries gets thrown out to start defending itself again from the many dogs-of-finance out there.

There is so much written about freeing up the countries in order for them to access the markets while comparatively so little about how they should go about to avoid repeating the same mistakes that perhaps I should even frown when it is a regular investment banker who knocks on my door and asks for my daughter. I mean what is some hundred of percents on some few millions when compared to some basis point on a couple of billions.

Tuesday, May 16, 2006

The Debt Sustainability Analysis (SDL)

Of course the whole SDL debate is based on some very good intentions, like not saddling the countries with excessive debts, and finding adequate means by which to allocate the IDA development resources between loans and grants. Nonetheless, when reading the many papers about “Debt Intolerance,” most of them ridiculously obscured by complex econometrics, I felt that the World Bank was focusing on the issue from a totally wrong perspective.

Instead of analyzing the relevant issues such as the credit-absorption capacity of countries and of how their credits could better contribute to growth and repayment capacity, the WB now seemed to be appearing in the role of any investment bankers, worried about how much of their credit products they could push. In doing so I felt that the WB was, unwittingly and unwillingly, lending force to the belief that a debt was OK, as long as it was sustainable. In my mind, there cannot be a road more conducive to debt turning unsustainable, than to award credits just because they are sustainable.

My potpourri of sometimes somewhat repetitive and not always congruous objections included among others:


SDL analysis is somewhat similar to calculating a sustainable credit line for a compulsive gambler. What politician (anywhere) would resist the multiple temptations of not using an available “allotment” of sustainable credits? Worse, these levels would still be taken only as a minimum, with nothing to stop the rest of the markets pushing even more loans.

The debate on debt sustainability sometimes sounded to me like debating whether you can smoke one, two or three packages of cigarettes a day before smoking kills you. In my case, after not having smoked one single cigarette in more than ten years—and not one single week goes by without being seriously tempted—I am certain that my own “nonsmoking sustainability level” is an absolute zero cigarettes. With respect to public debt, we know there are governments really hooked on public debt and then perhaps their debt sustainability level should be an equally big zero. As it must be very difficult to free someone from a vice with as much addictive power as credits payable by future generations, it might be safer if the Bank and the Fund recommend cutting the habit altogether, cold-turkey, instead of suggesting a life on the border of sustainable (healthy?) levels of debt consumption.

There are cases were SDL calculations are clearly a very valid and needed starting point, as when they are made in relation to the restructuring of debts. Nonetheless, in those cases, attention needs to be focused more on issues such as the amortization profile of the debt, the lowering of interest costs, and the systems put in place to avoid contracting new general nonpurpose debt.

The true purpose of credits

Let us never forget that if credits are correctly awarded and contracted, the whole concept of “debt sustainability” should be a moot issue. New mediocre credits awarded that have small chances to generate repayment capacity, might very well push a country into unsustainability but it is also very possible that new good credits to a country with excessive debt is the only alternative to get it out of unsustainability.

The WB should not be seen as lowering the bar by accepting the concept of unproductive credits as long as they are within certain limits. Instead, the real challenge is to go back to the basics, making effective use of scarce resources, assuring that new credits are productive and, one way or another, generate their own repayment. If this is not so, then the creditor, rightly, even the WB, should also stand to lose as a creditor.

We have been presented a framework for how these debt-sustainable levels are to be determined but in order to mean anything the framework needs to go much further than just determining whether a country can manage public debt of 40, 50, or 60% of its GNP, or of 100, 150, or 200% of its export earnings. Why is there so little analysis about the real causes of its current debt? And why is there so little effort made to ascertain that those causes are truly remedied?

Every dollar of debt that is not used adequately to advance development eats up a dollar of debt-servicing capacity that could be more productively used. In this respect, the use of available space calculated under this framework as a justification for an “increase in poverty-reducing expenditures” or “to meet their Millennium Development Goals” could perversely induce many low-income countries to fill up their credit space without generating the growth they so much need.

The framework, almost as an afterthought, on a case-by-case basis, even when there is no sustainability room left, contains some wording about the importance of accommodating loans designated for specific high-return projects. In fact, the WB should always be looking for those high-return projects that generate poverty-reducing growth.

Moral hazards

One of the yet unsolved mysteries of the world of Public Finance is how politicians can delicately manage the contradiction that arises from declaring all outstanding old public debt to be evil, while simultaneously preaching the virtues of any new credits to their country.

Declaring a debt as “sustainable” (as opposed to self-repayable credit) implies that the debt will be repaid by those coming afterwards. So it would seem that perhaps those in real need of a voice speaking out on their behalf are the future generations.

There is a tough real-world question begging for an answer: What is better: to reach an unsustainable debt level, to have a crisis and get it out of your system, or to condemn yourself and future generations to living forever under the burden of technically correctly calculated sustainable debt levels?

Rewarding countries that have policies that development experts deem to be of poor quality with a higher proportion of concessionality (meaning more grants, fewer loans) screams out the presence of an immense moral hazard. Although reductions in the overall credit volume might in fact mitigate some of the problems caused by excessive debt, the framework has to be crystal clear about what it means, as there are always many parties interested in what it should not mean.

On thresholds

The Bank cares a lot about keeping high standards in procurement, but, out there, in the real world, there are many debt-pushers who just love the addictions they create. Much debt is contracted by nontransparent means, hidden, either in the darkness of smoky-room negotiations or in the technical financial sophistications that make it impossible for any mortal to understand what is going on, especially with so little intelligible data available to their mortal citizens. Odious debt? Yes, there is a lot, but let us not forget that for every penny of odious debt that exists, there is an almost penny by penny match of odious credit. I have written about Odious Debt and about Odious Credits; perhaps it is time for me to write about Odious Thresholds.

Begging for humility

Most of the documents coming out from the Debt Sustainability Analysis (DSA) correctly state that the conclusions should at best serve as rough guidance and indicative guideposts. Nonetheless by including so many references to strong empirical evidence, robustness, and strong analytical underpinnings, they end up anyhow overstating its validity.

The case for more humility and lower expectations with respect to the reliability of the DSA is laid out with crude clarity by the United States General Accounting Office (GAO) in its study of the IMF’s capacity to predict crisis, published in June 2003 (SecM2003-0306). In it, GAO states, among other things, that of 134 recessions occurring between 1991 and 2001, IMF was able to forecast correctly only 11 percent of them, and that it was similarly bad in forecasting current accounts results. Moreover, when using their Early Warning Systems Models (EWS), in 80 percent of the cases where a crisis over the next 24 months was predicted by IMF no crisis occurred. Furthermore, in about 9 percent of the cases where no crisis was predicted, there was a crisis.

Domestic debt

Frequently, just because of the lack of adequate data, there are proposals to disconnect the DSA from the analysis of the domestic debt, an idea which is just plain crazy. There is no way on earth that you can argue, or justify, that a debt-sustainability framework can be developed exclusively for the external public debt of a country, ignoring the domestic.

I guess the above is another prime example of what can happen when we allow the econometrists an excessive influence. Oh we cannot get data? Do not let that stop us! In their desperation, I even heard some of the number-masseurs put forward the weird argument that the assessment of, and the response to, domestic debt in low-income countries, although critical, did not lend itself to a threshold approach. Weird, because they did not seem to notice that, if true, this should cast doubts over the whole DSA framework itself.

Crowding out the private sector

Considering the importance given by the WB to the private sector as a development agent, I was always upset to find so few and sparse references in the DSA to the issue of how public debt crowds out of the private sector from the credit markets. From my point of view, one of the main determinants when calculating debt sustainability should be this factor and indeed if the DSA decrees as untenable any public credit that raises the cost of private debt more than x number of basis points, I might have reacted quite differently to the debate.

Currently defining a country’s debt sustainability in terms of how much public debt it can have before risking default sounds to me like setting the bar unbearably high, since long before that happens, the private sector is probably already long gone.

As a sort of consolation I read somewhere that we Directors had agreed that private external debt was potentially less troublesome than public debt, but this is of course a far cry from declaring as an absolute development need that the private sector should have competitive access to external debt.

Of course there are traders and investors who do have a particular interest in the probability of sovereign risk defaults but, in fact, most ordinary citizens and entrepreneurs are much more interested in making sure that the public debt does not crowd out their own opportunities of accessing credits on reasonable terms and costs. Of course, the Bank and the Fund must know with whom they should team up.

Public debt could sometimes be described as financial emphysema inasmuch as it makes it harder for the private economy to breathe properly. In some cases the secondary hazards produced by public-sector debts, might be so large that they should perhaps be entirely prohibited.

Credit Ratings?

Some of the data and conclusions coming out from the DSA are supposed to be made transparently public, as they indeed should be—to all the market. We have also been told that this information will not develop into a sort of credit-rating system but it is hard to understand why this would not happen. In this respect, the Bank needs to understand better the reactions of the market, because it might very well happen that when the Bank proposes more concessions in response to a low-debt sustainability, other market players might respond by asking for higher interest or shorter repayment terms, so as to make up for the higher risks announced by the Knowledge Bank.

Why consensus?

While we appreciate the worth of a diversity of opinions, I cannot understand how at the same time we give such great importance to having a consensus of opinion between the Bank and the Fund. For instance, on the issue of banking regulations, I have frequently warned that the mentality of a Central Bank regulator who pursues with zealous fervor the avoidance of a crisis, at any cost may lead to the exclusion of other key objectives of a financial system, such as generating growth and distributing income. In this respect, we might on the contrary need the Bank to differ outspokenly from the Fund.

Costs and efforts

Currently there is a lot of frantic activity analyzing debt sustainability, mainly in the Fund. If we add up all the resources used, we might come up with quite an impressive figure, and it would be a shame if all those efforts came to naught just because of a lack of focus. Whatever you do, please rein in all those econometricians who with little or no ideas about debt are having the time of their life, having been given a license to regress on whatever variable they can imagine.


Grants or loans? Neither! Just more open markets, let us trade, in all services as well, and let us do business.

A word of caution about Financial Leverage

If a project is expected to produce 10% in returns and an investor can borrow half of the funds needed at 8% then, on his own investments, he will make 12%. That’s why financial leverage is considered a good thing. Of course if the project then only makes 6% for the investor, as he still has to pay all the interest on the loans, he will see his return drop to 4% and that’s is why financial leverage has risks.

Mixing your capital and debts in such a way as to extract the highest possible profit for a certain level of risk is basically what finance is all about. As good and useful as financial leverage can be for the private sector, its application for the public sector though is far from that straightforward.

The main problem with financial leverage in the public sector is that there is a gap too wide between the immediate beneficiaries and the final payers of the risk. If a private investor does badly he will normally pay for it himself shortly, sometimes even before the investment has taken place, as there are stock markets that evaluate his investment decisions in a flash. However, if it is the public sector, the payee of any loss is an anonymous next generation of citizens or, at the earliest, the next government. When you can reap all the goodies today and have someone else pay for them tomorrow we must know that the stage is set for committing huge mistakes.

That is why I get so angry when financial professionals so haphazardly extol the virtues of debt and believe them applicable across the board.
Extracted from my Voice and Noise

Thursday, April 22, 2004

Odious Credit

I recently wrote about odious foreign public debt, that debt about which there is a current debate in the world as to whether it can be legally repudiated if it is taken on by illegitimate governments or for illegitimate ends. The other side of the coin is odious credit. Please don’t think I’m against banks—quite the opposite. But I respect the role of the financial middlemen too highly to keep quiet when they are not doing their job right. In 1981, the representative of a foreign bank in Venezuela showed me a letter in which his boss instructed him to “give credit to the INAVI, Venezuela’s National Housing Institute. It’s the worst public institution, which means that it pays us the highest rate and, as you know, in the end it’s just as public as the best of them and Venezuela will have to pay up just the same.” Odious credit, isn’t it?

The first thing a good banker should ask a client applying for a loan is what is it for and if the answer is not satisfactory he should reject the application, regardless of the guarantees offered. Simple plain-vanilla fraud of the Parmalat kind will always exist, but the asinine way all their creditors fell into the trap makes one suspect that this is only the first case of systemic risk in the banking system: tempted by the regulators in Basel, banks subordinate their own criteria to those dictated by auditors and credit raters. This development, bad in itself, is even more serious in the case of public credit, where the what it’s for is being replaced by how much can be carried, perversely derived by calculating the level of sustainable public debt.

When I call for the total elimination of foreign public debt (which is feasible and would not require huge sacrifices in an oil rich land like Venezuela) my colleagues often argue that a certain level of debt is good and necessary for the country. This does not convince me, since it makes debt sound like electricity that must be kept at a certain voltage. Because public debt must always be paid back, regardless of whether anybody ever knew what or whom it was for, I’m fighting for the day when the private sector in Venezuela can return to the markets, freely, without having to carry that huge monkey—foreign public debt—on its back.

In my opinion, the Benemérito (the dictator Juan Vicente Gómez (1864–1935) who ruled the country between 1908 and 1935) deserved great credit for ridding Venezuela of her foreign debts He certainly knew that to shake off that vice more than patches or pieces of chewing gum are needed.

From El Universal, Caracas, April 22, 2004

Thursday, March 25, 2004

Odious Debt

One of my recent articles, which focused on the need to protect the environment, concluded by recalling the ancient proverb, “We have not inherited the world from our parents; we have borrowed it from our children.” On that occasion, as always, I thought about Venezuela and I knew that, as borrowers from our children, we have acted like veritable pigs. Not only have we extracted our country’s oil without putting it to much good use, we’ve even mortgaged its future in the process.

Some countries may be in need of foreign loans to get on their feet, but here in Venezuela we ought to know by now that our foreign public debt, be it the debt of yesterday, today, or tomorrow, only serves to fasten us all the more securely to a sinking ship. Foreign public debt is a monstrous obstacle. It keeps our citizens from getting loans (or at least makes loans much more expensive) that could indeed lead to growth in the country and allow the government to satisfy social needs through taxation.

Our only salvation is to learn how to resist the lure of the eternal sirens’ song, which goes “foreign debt taken on by the previous administrations is evil and good for nothing, but rest assured, with us, everything’s going to be different.” How do we—like the ancient Odysseus—tie ourselves to the mast?

There are those, in similar desperation, who argue that since our creditors were accomplices of those administrations, we shouldn’t pay our debts to them. I accept the theory of complicity, at least on the part of the intermediaries, but I think we should punish them much more harshly, by canceling the entire debt and never again taking out another loan.

What can ordinary citizens do who want to and have to go about their daily lives and can’t be continually overseeing the government? The same as any company: they can refuse to provide their management with authorization for contracting debts. Along these lines, a doctrine is now being discussed in the world according to which, if the debt was contracted by an illegitimate government, or for uses that were clearly of no benefit to the country said debt could be declared odious and, as such, would not be legally demandable.

Dear friends, if we are going to do right by our children, our grandchildren, and our great grandchildren, and return the country we borrowed from them in good shape, maybe we should take advantage of such a possibility and declare our foreign public debt eternally odious. Given that threat: Would creditors dare provide us with loans? What would the credit-rating agencies say? Or let us be even more clear about the message and amend our constitution to say that the government of Venezuela has no authority to borrow from foreign sources, that any attempt to do so is illegal, and hence that all such illegal debts will not be repaid. That should stop foreigners from lending us money!

From El Universal, Caracas, March 25, 2004

Monday, July 14, 2003

US GAO Report on IMF’s ability to Anticipate, Prevent, and Resolve Financial Crises.

Dear Colleagues,

It is an extraordinary document, as within the context of “According to World Bank estimates, the financial costs to countries that experienced crisis in the 1980s and 1990s exceeded $1 trillion—greater than the total amount of all donors’ assistance to developing countries,” it puts forward statements such as:

“During the 1991–2001 forecast periods, 134 recessions occurred in all 87 emerging market countries. We found that the WEO (World Economic Outlook) correctly forecasted only 15, or 11 percent, of those recessions, while predicting an increase in GDP in the other 119 actual recessions.”

“Our analysis for the 87 emerging countries shows that, for more than 75 percent of the countries, the WEO current account forecasts were less accurate than if the Fund had simply assumed that the next year’s current account would be the same as this year’s. The results are even more dramatic for G7 countries: a forecast of no change was a better predictor than the WEO forecast for six of the seven countries. This demonstrates that, even in stable economies with excellent data, the WEO has done a poor job of forecasting this key crisis anticipation variable.”

“Internal assessment of the Fund’s EWS (Early Warning System) models shows that they are weak predictors of actual crisis. The models’ most significant limitation is that they have high false-alarm rates. In about 80 percent of the cases where a crisis was predicted over the next 24 months, no crisis occurred. Furthermore, in about 9 percent of the cases where no crisis was predicted, there was a crisis.”

I find that the document, presented not by any unknown NGO but by an important official entity of the United States, raises some very serious questions that we cannot, and should not, ignore.

In any normal private environment, unless the forecasters were sons of the founders, they would have been fired. In institutions such as the IMF that predicate accountability, has this ever occurred?

With such an amazingly lousy track record, would the Bank be better served by assuming a contrarian strategy in terms of getting in when IMF announces crisis?

Does IMF’s lackluster performance suggest the need for reviewing the risks of delegating so much authority in today’s financial markets to perhaps equally fallible credit-rating agencies?

Yesterday, we had a Steering Committee and, to my surprise, I did not see even a small informal session planned for the discussion of this document. I can perfectly understand the need of solidarity with institutions such as IMF, but it has to have its boundaries especially as our solidarity with the countries and the poor has to be in the forefront.

The world will take this document in its hand and, once it really comprehends that it is reading what it is reading, suddenly very serious questions could be asked.

Finally, the report includes on its cover the legend: “This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank Group authorization.” As its whole contents, and much more, can easily be found on the GAO’s Web page, I wonder whether we are not better served by including the confidentiality clause only when it is truly confidential, at least in these times of transparency.


Extracted from "Voice and Noise" 2006 

Thursday, June 5, 2003

An Unsustainable Sustainability

The latest fashion in the academic world of international finance is to calculate what is known as the Sustainable Debt Level (SDL). As you may have guessed, it has to do with the level of public debt a country can sustain without entering into a crisis. Normally the SDL is calculated based on the size of the economy (GNP) or on a country’s exports.

Whatever scientific approach is given to the SDL issue, it sure seems somewhat obscene to the citizenry of countries where it is evident that public debt engenders low or even no productivity.

If a credit is granted properly, the credit is repaid and then debt levels never become a problem. It is only the bad or mediocre loans that accumulate—those that do not generate their own repayment. So it could be said that what is really being calculated with the SDL is the level of bad debt that a country can get saddled with. Quite frankly, a developing country with real needs cannot afford the luxury of canceling even one cent in interest on a debt level arising from a series of credits that are nonproductive on the average.

From this perspective and since what we really mean is sustaining something that is unsustainable, this question remains: wouldn’t it be better to skip calculating this debt level and try to free ourselves once and for all from these mortgages, instead of condemning future generations to live forever under the weight of an SDL that has been perfectly calculated? How much torture can the torture victim take before passing out?

And who encouraged these countries to go into debt? Ask those who are well-acquainted with the temptation that credits pose to politicians. In China, they say that you wish for your enemies to live in interesting times. In Argentina, because of the suffering provoked by excessive debt, it would seem that what their enemies could have wished upon them was the trust and confidence of international markets.

On the day that our country Venezuela firmly and irrevocably sets upon the path of totally canceling its debt, on this day an enormous opportunity will open for all those private and collective initiatives that need financial oxygen. Unfortunately it will not be easy, since our politicians, while condemning past debts, have mastered the magic of simultaneously preaching the benefits of new credits.

Friday, September 27, 2002

The Riskiness of Country Risk

How horrible it must be to work as an air-traffic controller! Any slight error can provoke an unimaginable human tragedy. No wonder these professionals burn out so rapidly. I “suppose” the same must happen with the country-risk assessors, those people who carefully pass judgment as to what the country risk is for any given nation.

The all important mission of these risk evaluators is twofold. The first, that for which they are actually paid, consists of analyzing whether or not the debtor nation will ultimately be able to honor its obligations. This determines whether or not pension funds, banks, and insurance companies will be willing, or even allowed, to invest in that country’s sovereign debt instruments. The second, even more important than the first, is to send subtle signals to the governments of these nations in order to help them improve their performance.

What a difficult job this is! If they overdo it and underestimate the risk of a given country, the latter will most assuredly be inundated with fresh loans and will be leveraged to the hilt. The result will be a serious wave of adjustments sometime down the line. If on the contrary, they exaggerate the country’s risk level, it can only result in a reduction in the market value of the national debt, increasing interest expense and making access to international financial markets difficult. The initial mistake will unfortunately turn out to be true, a self-fulfilling prophecy. Any which way, either extreme will cause hunger and human misery.

What a nightmare it must be to be risk evaluator! Imagine trying to get some shuteye while lying awake in bed thinking that any moment one of those judges, those with the global reach that have a say in anything and everything, determinates that a country has become essentially bankrupt due to your mistake, and then drags you kicking and screaming before an International Court, accused of violating human rights. If I were to be in the position of evaluating country risk, I would insure that the process is totally transparent, even though this takes away some of the shine of the profession and obligates me to sacrifice some of my personal market value.

How lucky we are that we are neither air-traffic controllers nor sovereign-risk evaluators! However, since we can easily become victims of their missteps, it behooves us, if only because of our survival instinct, to make sure that both do their jobs correctly.

We have seen in recent Country Reports how, after having introduced a myriad of information into the black box of methodology, as if by magic, a credit qualification is produced. Many of these reports seem to me like the pronouncements of film critics. It would seem that, more often than not, the individual evaluator is determining more how much he likes the ways or forms the Directors of a nation try to honor its obligations than on producing an honest and profound financial analysis of the country’s capacity for servicing its debt correctly.

In his book The Future of Ideas: The Fate of the Commons in a Connected World (New York: Random House, 2001), Lawrence Lessig maintains that an era is identified not so much by what is debated, but by what is actually accepted as true and so is not debated at all. In this sense, given the risk that the perceived country risk actually becomes the real country risk, it is best not to assign an AAA rating blithely to the risk qualifiers—perhaps not even a two-thumbs-up.

From The Daily Journal, Caracas, September 27, 2002

Tuesday, October 6, 1998

The Bad Habit Of External Public Debt

I am amongst those who believe that one of the most important reforms we can bequeath to future generations of Venezuelans would be that of forcing the country to begin a gradual but real amortization of its external public debt. When the latter reaches zero, we should then constitutionally prohibit new indebtedness.

I consider this perfectly justifiable due to a) the dreadful experience we have had in the past with our public debt; b) the fact that even the slightest improvement in the country’s economic climate incites the international financial sector to press more loans into our hands; and c) the fact that it must be very difficult for our leaders to resist the temptation of reaching out for those new resources.

The arguments are simple and unsophisticated. As such, they are of little help in the battle against the thesis, universally accepted, that foreign debt is absolutely necessary in order to maximize the development of a nation. This thesis is even considered applicable in countries like Venezuela, which receive resources from sources other than debt that amply surpass its capacity to digest them efficiently.

I obviously believe in access by the private sector to the international capital markets. If there were no public external debt, the market conditions in Venezuela would be very different from those we have today. Today’s conditions could be summarized as being 3% over a country risk factor of 20%. It is difficult to take on debt in Bolívares at 70% interest even when there is the “hope” that inflation or devaluation will erode the real cost of the debt. It is virtually impossible to contemplate debt in Dollars at 23% interest when taking into account that inflation in the United States is somewhere around 2% per annum and the world threatens to hit us with recession.

Today, every politician agrees with the thesis that we should shrink the size of the public sector and reduce the number of public employees. The majority of them are in favor of the “bit-by-bit” method, arguing that these layoffs should be implemented only when the private sector creates the offsetting job opportunities. The classic case of the chicken or the egg!

The private sector will only be able to be the motor of development when the mortgage of the external private debt that indirectly taxes its activities is removed. We cannot expect the help of banks and the international financial entities with this task. For decades, we have heard their calls for the reduction of the public sector while, with the same breath, they request the Republic’s guarantees in order to lend resources to the private sector.

One of the main worries the common Venezuelan citizen harbors is that solutions to the mismanagement of our current public debt, such as the partial sale of PDVSA or Citgo, will only contribute to the continuation of the orgy of bad administration of the State. I am sure that if we managed to implement a credible constitutional prohibition that will assure the population that our national debt crisis will not be repeated, it would be possible to reach a consensus.

The key word, of course, is “credible”. If we have learned anything from our past experience with modern democracies, it is that they have an immense capacity of altering their course in order to satisfy short term aims. Today we may applaud the prohibition mentioned above. Tomorrow they would probably look for our applause to lift the same prohibition.

A proposal such as this one, evidently has many natural enemies. On top of our leaders that like to win votes by using easy money, we also find the bankers that wish to place their resources, easily, with high yields and with “safety”.

When we say “safety” we mean that in our unreal world, a banker that lends funds to a private sector company that then goes broke due to the government’s erroneous policies puts his job at risk while the banker that only lends to the government, thereby abetting those very same policies, normally does so without risking his personal hide.

There are other enemies, not necessarily natural ones. These maintain that is in unpatriotic to limit the State’s attributions. These enemies can be recognized by the ease with which they maintain in the same breath that the actual debt is bad but that future debt is good. We remind these people that to govern while recognizing human failings and thereby avoiding further damage cannot possibly be unpatriotic.

To continue to believe egoistically that the next government, or the one after that, will not repeat the same errors is surely treason. If there is one nation in the world that can attest to this fact, it is Venezuela. The immense resources from the country’s oil production has not contributed much to the country. Certainly, the debt it has contracted has not contributed at all.