The Power and the Money

A different perspective

  I haven't been to Mérida, Venezuela, in decades.  (I haven't been to the one in Yucatán for about as long, either.)  I used to have an aunt who lived nearby.  She's long gone, and last I heard both her grown children (and their families) lived in Houston and Miami.  

Anyway, Gringa Diary is by an Australian socialist fervently working to further the triumph of the Bolivarian Revolution and turn back to the forces of imperialism.  I believe her name is Tamara Pearson.  It's a fascinating look into the Revolution, up-close-and-personal. 

Of course, her perspectives on the value of Mr. Chávez or the long-term impact of his policies on the poor of Venezuela are quite different from my own.  But she's so earnest about it.  Which is sort of touching, in a way.  More importantly, the true-believer tone infuses the blog with this sense of reading something for a parallel universe.  You read her stories, and more often than not find yourself scratching your head at her emotional reaction or logical analysis, so different from your own. 

But you can't get angry; she's so enthusiastic about it all.  Recommended. 

The fear of populism and populism to fear, or at least chuckle at

  I am at a bit of a loss to understand why the congressional Democrats are afraid of GOP populism on the Guantánamo issue.  We all know that the U.S. is perfectly capable of locking up dangerous individuals at no risk to the surrounding community.  We are, in fact, quite good at it.  Now, there are issues that can be demogogued, regardless of the facts, but the idea that there are any dangers in moving the detaineers in Cuba to the continental United States does not seem to be one of them.  Neither polls nor my general sense of the public atmosphere (judging from, well, crappy bars in Norfolk, Philly, and the greater Miami area) indicate that the demogoguery would have any tangible effect.  So why are the congressional Democrats running scared?  It makes no sense.

On the other hand, if you want some real populism, you go to Venezuela.  I'm telling you, a subsidized electric car called the “M----------r” would be a big hit in the United States, and get anybody re-elected.

Gotta be a marketing case in there somewhere.

There is no bloody resource curse already

  So there are these people out there, notably the Oracle of Flat, talking about how high oil prices lead countries to do all sorts of crazy things, like take stuff or invade their neighbors or build weird shit. Which is a problem, see, because except for the building of the weird shit the real world just doesn't fit the model. 

Above you’ve got an example of weird shit.  Ditto to the right.  But what about the neighbor-invading or stuff-taking?  Well, I don’t have a whole lot to say about neighbor-invading at the moment, but there is some stuff-taking in the news: the Bolivarian Republic just cancelled all its oil service contracts.  That’s a form of stuff-taking, yet, as the great and immortal Onyx once said, but wait it gets worse!   The government also intends to nationalize the contractors’ assets.  That is stuff-taking of the purest form, which the “resource curse” models predict isn’t supposed to happen when oil prices are low.  After all, the government is supposed to need the service companies to keep production up.  And yet, here we are.

“Oil service companies” are at-their-simplest basically oil companies that extract petroleum for a fixed price on behalf the owner ... in Venezuela’s case, the government.   With nationalization of the oil services, the government gets a threefer:  the assets, the value of future payments, and the value of all unpaid bills.  But it loses the companies’ ability to run and maintain the assets and opens itself up to arbitration and lawsuits.  It also loses future investment.  Oil companies will tolerate expropriations-that-weren’t, like the Bolivarian Republics’s so-called “nationalizations” up until now.  They have less patience over the real thing.  It’s a particular problem for Venezuela because its wells tend to have a half-life around three years.  Without continual new investment, production will decline.

I’m not sure what Chávez’s motivation is, although I can speculate.  I am sure, though, that this is another sign that the whole petropolitics idea is worth a lot less than a gallon of crude, even at current prices.  Sure, it might be possible to take the political resource curse theories and mash them to fit recent events in Venezuela, but then you would wind up with a theory that predicted that governments nationalize when prices go up and they nationalize when prices go down; or that they nationalize when they don't need foreign technology and they nationalize when they do.  In other words, you would get a theory that predicted that the governments of oil producing states should always nationalize at all times. 

The proper word for such a theory?  Worthless. 

Venezuela cede

  The Bolivarian Republic just settled with the Argentine owners of Ternium over Sidor, its Venezuelan steel unit.  The Venezuelan government nationalized Sidor in 2008.  Chávez offered $800 million.  Ternium scoffed and asked for $4 billion.  They just decided upon $1.97 billion.  Is that a fair price?

Ternium bought Sidor for $1.79 billion in 1997 and subsequently invested a lot of money, but that doesn't really tell you anything.  On the other hand, Sidor enjoyed revenues of $2.4 billion in 2007.  At a discount rate of 10 percent, the agreed-upon price implies a Sidor profit margin of 8 percent, which is consistent with the steel industry's average margin during the 2001 recession.  Conversely, at a profit margin of 16 percent, about what the industry earns in a boom, the implied discount rate is 19 percent ... which seems reasonable for a high-risk area like Venezuela.  (Bernard?) 

Upon announcement of the deal, the price of Ternium shares jumped 49 percent, to $15.67.  That said, the stock peaked at $45.18 on July 2, 2008, before sliding to $34.01 on August 8, and then collapsing to $4.65 by November 20.  The problem with interpreting that price collapse as evidence that the offered price isn't fair?  President Chávez announced the nationalization in April. 

In other words, the price appears to be fair.  Another demonstration of the power of ICSID?  Perhaps. We don't know if the Venezuelan government offered more money out of fear of an adverse arbitration result, or if it offered more money at the urging of the “semi-dictator” of Argentina, or it offered more money because the President of the Bolivarian Republic decided that it was simply the right thing to do. 

But we do know that the foreign oil companies can go to ICSID, and that Caracas seems to be a bit worried about the prospect.  We also know that Cemex is pursuing the ICSID route.  So we will see if the empire strikes back at the Revolution.

P.S.  FWIW, Argentine embassy accounts in France remain frozen.

Bolivarianism and Mercosur

 The Bolivarian Republic is seeking to join Mercosur.  Brazil's government supports the idea, but the Congress is a bit wary.  Foreign secretary Celso Amorim defended Venezuela's accession in a stormy committee meeting the day before yesterday.  In it, Amorim had to point out, loudly, that there is no evidence that the Venezuelan government stole elections.  A few days earlier Amorim was in Caracas attempting to persuade President Chávez to eliminate Venezuelan tariffs on 500-odd products before the Brazilian senate votes on the accession treaty, so as to reduce opposition. 

The thing is, I'm having trouble understanding how any of this matters.  Mercosur has a parliament, with members appointed from national Congresses, but it doesn't do anything.  (Which isn't surprising, but Brazil hedged its bets anyway:  as of 2011, Brazil will appoint 75 of the parliament's 154 members.  That kinda makes it unlikely that the other members will want to give it any serious power.)  Mercosur has a tribunal, but it doesn't do anything either.  Private individuals, unlike in Europe, can only bring suits by acting through their national governments.    Anyway, its decisions are regularly ignored.  In fact, its first decision was ignored.  And it failed its really big test, the Argentine blockades against an Uruguayan paper mill.  There's really nothing about investor protection or property rights in the founding treaties; the decision against Argentina rested on the fact that the blockades were in fact blocking trade.

In short, Mercosur is neither much of a confederation nor an effective tool for an informal Brazilian empire.  Which explains why Chávez wants in.  Why not?  But does not fully explain why Brazil wants him in, or why Brasilia insists on effective control over a powerless parliament. 

There is something going on here that I don't understand.

UPDATE:  The picture comes from Jussi in comments.  It had to be posted.

Oh no he di’n’t

  Well.  One of the leaders of the Republican party, a former Speaker of the House, and a plausible presidential candidate, goes to the Bronx and calls Cristina Fernández a “semi-dictator.”   

No, seriously.  Chávez, though, got to be a full dictator, while poor Danny Ortega got lumped in with Cristina among the “semis.” 

Now that is funny.  Ortega, who unlike the other two has in fact engaged in election fraud, becomes the same as Fernández.  Now, it is true that about a year ago she tried and failed to make an end-run around Congress in order to impose an agricultural export tax.  But our last president tried and succeeded to make an end-run around Congress in order to detain suspects indefinitely and monitor all communications crossing the country's border ... and while George Bush the Younger was many things, a “semi-dictator” was not one of them. 

Meanwhile, I really do need to repeat that Venezuela is not a dictatorship.  Most of the anti-Chavista opposition recognizes that.  And even should Chávez turn it into one, Venezuela poses no threat to the United States.  Let him slosh money around!  He gets nothing for it.   

Still, I can understand how he makes a useful foil for American conservatives.  I've heard lefties say stupider things about President Uribe ... although never anyone as prominent as Newt Gingrich.  But making Argentina into an enemy of the United States?  Huh?  Argentina??

So I've really got to wonder.  Can somebody explain what's going on with the GOP and the crazy pills?  I'm at a loss.

I guess I must reluctantly come around to the position that it is time to eliminate the filibuster. 

Bandwagoning on the catblogging

  This was one aggressive little dude, not at all put off by cigar smoke.  I almost took him home, but he certainly seemed well-fed enough to belong to somebody.

I got nothin'.

The other Castro

  Cipriano Castro managed to make a bit of a hash of Venezuela during his brief regime.  He gained power in 1899, at the head of a revolutionary army.  His army mobilized resources by confiscating property; sometimes of opponents, sometimes not.  Eventually he provoked a bunch of European navies into blockading him.  The resulting diplomatic mess eventually dragged in the United States, who was worried that Germany intended to, say, scarfle off some Venezuelan islands and establish a naval base.  Or something.

So it isn't really clear to me why Hugo Chávez would want to replace a bust of Rómulo Gallegos with one of Cipriano Castro in the presidential palace. 

And then Leticia Arroyo sent me this speech by Castro made on December 9th, 1902, just as the European navies started sinking Venezuelan ships in the harbor of La Guaira:

Venezuelans!

The insolent foot of the foreigner has profaned the sacred soil of the Fatherland!  An extraordinary act in the history of the civilized nations, without precedent, without possible justification, a barbarous act because it is an attack on the most rudimentary principles of international law, an ignoble act because it is the fruit of an immoral and cowardly collusion of force and betrayal, it is something that the English and German squadrons have just done in the harbor of La Guaira just a few moments ago:  in a simultaneous and coordinated action they surprised and captured three undefended ships of our navy that had entered dock for repairs. 

The battle is unequal because two of the most powerful nations of Europe have conducted an attack against our country, which has barely made it out of a  long and painful convalescence ... But justice is on our side, as is the God of the Nations who inspired Bolívar and the constellation of heroes who accompanied him in the great work of bringing us, at the cost of great sacrifice, our Fatherland free and independent ... For my part I am prepared to sacrifice everything on the altar of the Fatherland, everything, including what one might call my anguish over our internal differences.  I have no memory of what disagreements may have occurred in the past.  Erased in my thoughts are the politics and fighting of all who were opposed to my aims, of all who have been able to leave a trace of pain in my heart.  In front of me lies no less than the luminous vision of the Fatherland, of which Bolívar dreamed, of which I dream.

... I open the doors of the Republic’s jails for the political prisoners who still remain in them; I also open the doors of the Fatherland for those Venezuelans who remain abroad for similar reasons and return to them under the constitution the properties of all the revolutionaries who lost them for reasons of public order.  Further still, if I survive these events ... I am prepared to return to private life, leaving behind my sword, of course, at the service of the Republic, and you can be sure that I will retire sans nostalgia for power, because my greatest aspiration is to see my great Fatherland prosperous and happy.

Now I see exactly what Hugo sees in this guy.  I can imagine him giving this speech on Aló Presidente, word for word.  Some things never change indeed.

¡Hasta la reelección siempre!

  I am starting to miss Anonymous.  He was obnoxious, abrasive, and arrogant, but I am now realizing that this blog is lesser sans his commentaries. 

But anyway, great news from Venezuela!  It looks like we just might have Hugo Chávez to kick around for a while more.  And I'll admit that I am in fact generally opposed to term limits.  What have they ever gotten the United States?  Eisenhower and Reagan were unlikely to have run again for health reasons, and a third Clinton term would have spared us ... you know.  All the stuff. 

Of course, Hugo isn't Ike, Ron, or Bill.  And there are circumstances under which term limits might make sense, especially in countries with histories of patronage politics.  But still.  In addition, the Bolivarian republic placed term limits on all elected offices, which is why Venezuelans voted on the following somewhat turgid question to change five different constitutional articles:

Do you approve the amendment of articles 160, 162, 174, 192 and 230 of the Constitution of the Republic, as approved by the National Assembly, that increases the political rights of the people by allowing any citizen holding elected office to be nominated as candidate for the same office for the constitutionally-established period of time, depending upon his or her possible election, exclusively by popular vote?

I like the “increases the political rights of the people” part.  Clever framing.  And, well, true. 

In short, as unenthused as I am with President Chávez, I can't view the outcome of this election as some sort of great loss for Venezuelan democracy. 

Plus, I'd bet against his victory in the next election.

Schoolhouse rock, Venezuelan-campaign style

 A friend of mine (who works for the government ... shhhh!) sent me this Venezuelan television commercial.  It's about the referendum on abolishing presidential term limits. 

Kinda catchy, I think.  Can the Sí-side match it?

The expropriation that wasn't

  Kevin Drum and Dan Drezner wonder why the oil companies would get back into Venezuela after the way Hugo Chávez treated them the first time around.  The answer is simple:  Chávez didn’t treat them badly.  When oil prices head back up, they’ll do fine even if he plays the same movie all over again. 

“What???” you say?  How can that be?  Simple.  Between 2004 and 2006, the Bolivarian Republic of Venezuela expropriated the marginal surplus generated by the run-up in oil prices.  It did not, however, reduce the revenues of the oil companies.  They took home about $10 a barrel when the contracts were signed in the late 1990s, and they took home about $10 a barrel in 2008.  In fact, some of the companies that had signed service contracts under the old regime received more money under the Bolivarian regime than they would have under the original rules.

So why not get back in?  It isn’t like there are a whole lot of places around the world for the oil companies to invest in, especially not on-shore.  Most oil reserves are closed to the majors, and political risk is everywhere, including Alaska under its radical socialist governor.   The companies have little chance of enjoying the upside from a return to high prices, but with estimated costs of $6-$7 a barrel, Venezuela is still a good bet. 

Details and money graph below the fold.

Around the Revolution

  “You know, I’ve always wondered what South America would look like if no one gave a damn about coca or Communism.  It’s always impressed me the way you boys have carved this place up.”

“I’ll take that as a compliment, coming from a Brit.” 

Now that the U.S. election is over and James Bond is officially a friend of Evo Morales, it's time to take a trip around the Bolivarian Revolution.  How is the red banner faring around the continent? 

Yankee go home

Human Rights Watch published an unflattering report about civil liberty under President Chávez.  As these things go, the report isn't all that damning.  It basically accuses him of, well, setting up a political machine:  (1) using the executive power of the state to go after political opponents; (2) undercutting the independence of the judiciary; and (3) denying resources to independent or opposition organizations.  It doesn't accuse him of tossing opponents in jail or ending freedom of expression. 

The reaction of the Bolivarian Republic?  Expel the authors.  The irony needs no comment.

Here is an English-language response to the report from the Venezuela government.  Here is an explanation of the expulsion.  Let me point out that the expulsion is entirely legal under Venezuelan law, and that many fully-democratic nations have similar (if seldom used) provisions. 

The HRW report is an interesting read, if you have the time.   

Reason to fear

I worry about Venezuelan government spending.  I just don't believe that oil prices are going to stay this high for long.

I could be wrong, but one of the things I learned in Venezuela was that Belize started producing oil in 2006.  They quite literally found oil on some dude's farm.  Production is now up to 3,000 barrels per day.  That's about 15 trips per day for a typical tanker truck.

Even more strangely, Venezuela gives Belize money through Petrocaribe.  Chávez, I would think, gets even less out of his spending there than in the rest of the Caribbean. He is, in essence, giving away money to up global oil production with only a very small claim on the corresponding returns. 

So, nothing in the global scheme.  But when prices are so high that Belize gets into the oil industry, you've got a tidal wave of other producers waiting in the wings.  They'll be high-cost, of course, so given the increase in global demand the days of $20-per-barrel oil are over.  In fact, I'd bet that the days of $40 oil are over.  But I wouldn't bet on triple-digit prices being with us for much longer.

Strangely enough, I'd like to be wrong.  For the planet.   

Daleyismo en Venezuela

I argued that President Chávez is building a political machine in Venezuela, not unlike the machines that used to riddle American politics.  Since Venezuela is obviously not a communist country, or even heading that way, I called it “Daleyism.” 

Anonymous responded:  “This is an absolutely retarded phrase. There is not a shred of evidence that this is happening in Venezuela. I’ve lived here for over three years, and know all kinds of families that do not belong to the PSUV, that absolutely hate Chavez, and have voted against him repeatedly, and they still have full access to ALL the benefits of the government, including state health care, education, subsidized food, pensions, etc. etc.” 

Anonymous, however, is wrong. 

How do I know that?  Simply put, because the Venezuelan government provided us with the data we need to see Daleyism in action.  In 2003, the opposition collected 3.5 million signatures calling for a recall election under the 1999 constitution.  In 2004, the government put all 3.5 million names on the web, including birthdates and addresses.  Chang-Tai Hsieh, Ted Miguel, Daniel Ortega (not this one, another Daniel Ortega), and Francisco Rodríguez realized that they could take the government’s list and check it against the Venezuelan household and industrial surveys.  The surveys follow 150,000 people twice a year, and include birthdates, gender, and residence, enough to match 87,100 of them against the list.  The industrial surveys track firms, but the identity of the firms’ board members is public.  Access to this data, then, let them see what, if anything, happened to the incomes and employment of signers versus non-signers. 

People who signed the recall petition saw a 4% drop in their incomes relative to non-signers.  Why?  Easy:  there is a big relative drop in public-sector employment of signers (4.3%), and signers who lost their jobs were more likely to have to move into the informal (and badly-paid) sector.  Now, Venezuela is a politicized society:  government supporters (ID’d as the signers of a counterpetition) saw an even bigger relative drop in their private-sector employment (5.9%), but they didn’t see a drop in their income, because they moved into the public sector.

Richard Joseph Daley would be impressed.

But Hugo Chávez is better than Richard Daley; no, he’s almost as good as Richard Nixon.  Remember my last post about Venezuela?  How Chávez has improved tax collection?  Well, as any American who remembers the Nixon administration knows quite well, a politicized and effective tax authority can be a very useful part of a machine.  Turns out that companies whose board members signed anti-government petitions saw a 33% relative increase in their assessed taxes.  (US$305,360 versus US$229,020.)  That’s the “ugly” part of Venezuela’s better tax administration.

They also received 51% less subsidized foreign exchange.  In a country where the government rations foreign exchange at subsidized prices, that’s one hella competitive disadvantage.

Brilliant machine politics!  Part of me can’t help but be impressed, although I suspect, given my general humorlessness about legal corruption here at home, that feeling would go away right quick were I in fact Venezuelan. 

More later on the misiones and PDVSA’s social spending.  But right now, back over to you, Anonymous.

Taxes and revolution

President Chávez has accomplished one big thing over the last few years:  he's significantly raised non-oil tax revenues.  Venezuela, like most Latin American countries, needs public spending on public goods.  For that, you need revenue ... preferably revenue that isn't directly tied to commodity prices.  For all the other mishandling of the Bolivarian Revolution, one necessary thing that the government has done right was bring on the fisc.

   

Of course, I had some doubts about this at the airport, where the first thing you see at customs is a big poster exhorting you not to cheat on your taxes.  That kind of thing is rarely a good sign.

But numbers are numbers.  The yellow vertical line shows the date of Chávez's inauguration; the vertical axis is the percentage of GDP collected by these other taxes.  The dotted blue line shows a continuation of previous policy.  Underlying numbers come from Seniat, the Venezuelan tax authority.

So how did he do it?  Ah, that's a good story, below the fold.

Building a machine

Chávez is building a very sophisticated political machine.  And I do mean machine.  The idea is to make key aspects of everyday life dependent on support for the United Socialist Party of Venezuela (PSUV).  It's not Communism; rather, it's Daleyism, put in charge of a country.  Do it right, and there will be no need for secret police or election stealing.  Do it wrong, and your government will eventually (if you're unlucky) start breaking heads or (if you're lucky) become like Mexico.

(Photo courtesy of oilwars.blogspot.com.)

The least machine-like part of the emerging PSUV machine involves the Mercal stores.  The Bolivarian Republic imports food and other basic products (or purchases them from approved suppliers) at market prices, and then resells them to the public through the Mercales.  I visited several; except for the one in a high-priced part of Chacao, there were always lines.  This should not be unexpected, of course.  If the idea is to get basic products into people's hands at subsidized prices, then lines are what should result, if the prices really are subsidized.

The problems?  Well, the first general issue is that it's never clear whether blanket subsidies are an effective poverty-fighting program.  It's also even unclear whether they are an effective vote-getting policy.  After all, Mexico's elected governments (see Chapter Six) have switched to targeted programs, as have Brazil's ... and politicos in both countries are very good at fighting for votes.  Mexico's IMSS and ISSSTE tiendas are no longer subsidized, or crowded, and the Conasupo stores are long gone. 

The second, Venezuela-specific issue is below the fold.   

Vaqueros contra llaneros

Longtime readers of TPTM (all three of you) will note that Cemex has attracted some small controversy in these great United States as well as Venezuela.  But since Puerto Rico seems to have reconciled itself to vasty plumes of tire smoke floating across its southern shore, Venezuela is where the Cemex action is at these days.

So, how much are Cemex's assets in Venezuela worth?  Priceless, if this publicity still from El Economista is to be believed:

More seriously, according to today's El Economista, Venezuelan operations generated about 4% of Cemex's earnings before interest, taxes, depreciation and amortization.  In 2007, Cemex earned US$ 4.6 billion before interest, taxes, depreciation and amortization.    Four percent of that number is US$ 183 million. 

Cemex as a whole earned US$ 3.22 per ADR.  It's price/earnings ratio varied between 8 and 13 over the course of 2007; it's 12-month P/E is currently down to 6.2.

In other words, a simply back-of-the-envelope calculation puts the value of Cemex's operations in Venezuela between 183m × 6.2 = US$ 1.14 billion, and 183m × 13 = US$ 2.38 billion.

Since that 6.2 measure already embodies market belief in rising political risk and the recent run-up in input costs, I'd have to say that the US$ 1.3 billion value claimed by Cemex sounds pretty conservative.

Caracas probably shouldn't have taken on Monterrey so cavalierly.  Nobody should take on Monterrey so cavalierly.  Monterrey is a tough town, and businesses from Monterrey are tough businesses.  They've seen this sort of thing before, and they've come out ahead.

In this particular fight between the cowboys of the northern deserts and the cowboys of the southern plains, my money is on the regiomontanos of the northern desert. 

ICSID v Chávez

So, President Chávez nationalized the cement industry the other day.  Venezuela agreed to buy 89 per cent of Lafarge for $267m and 85 per cent of Holcim for $552m, but Cemex requested $1,300m.  Venezuela sent in troops to take over Cemex's installation, and then offered $650m.  Chávez called the Mexicans “disrespectful.”  After accusing Cemex of tax evasion and excessive pollution, he went on say, “They're as Latin as we are, but they feel closer to el Norte.”  President Calderón of Mexico was not happy, but there was not a lot that Mexico could do about it. 

But there is someone who can ... ICSID.  I've mentioned it before.  ICSID is powerful.  When lefties blather on about "empire" or whatever, things like ICSID are what they mean, even if they don't know it.  ICSID can cause pain.  In fact, Venezuela's nationalizations have consistently (so far Exxon and Conoco are the only exceptions) given the nationalized companies everything that they want. 

Of course, it costs a lot to go to ICSID, and it costs even more to get national courts to actually order attachments after a ruling, so companies usually don't start an arbitration unless they think that they can win.

Cemex appears to think it can win.

And it seems that the Venezuelan government agrees with Cemex.  Right after Cemex announced that it was going to take the Bolivarian Republic to ICSID, Venezuelan officials announced that hey, yo, don't get all upset about the troops thing, let's talk.  Sixty more days, okay?  At which point President Chávez told the world that he has a secret letter from President Calderón that will help resolve everything.  “We asked the Mexican government to give us one more chance with Cemex's executives to see if we can come to a mutual understanding,” he said. 

My money is on Cemex getting something close to the $1.3 billion that it wants.  But it will be interesting to watch.  Even if you're a Cemex shareholder.

    

Hasta que canta la gorda

Well, I still think I was correct in saying, “The United States is probably the only other country on the planet in which you might find an eatería,” but I don't seem to be as right as I thought I was.

This had me laughing.  Yes, the American influence here runs very deep.  Here's to you, Mr. Danger!

A special bond

On August 8th, my third day in Venezuela, the Bolivarian Republic announced that it would be buying another tranche of Argentine bonds, worth US$1.5 billion.  So what happened?  Something unexpected:  the price of Argentine bonds tanked, and the gap between the yield on Argentine bonds and U.S. Treasuries spiked above 7 percentage points.

The vertical white line is August 8th.

Now why would a bond purchase by a flush buyer cause investors to worry?  It’s not that Argentina overissued.  The country had only sold $7.46 billion of bonds to Venezuela, all of which involved refinancing existing debt, since the country is still running a budget surplus.  Nor is it the country’s recent default and repudiation:  that risk was already priced in. 

Well, the Bolivarian Republic bought the bonds from Argentina, but it sold them on to Venezuelan banks instead of holding on to them.  Why?  To soak up bolívares held by the banks before the banks lent them out.  It turns out the banks didn't hold on to these issues, but dumped them that very day “at practically whatever price,” in the words of La Nación’s business page.   

Moody’s downgrade from “positive” to “stable” followed along on August 14th, like clockwork. 

Of course, as you can see, the Bolivarian Republic’s own bonds aren’t doing too well either.  Strange, for a country in the midst of an oil boom, and supposedly known for its prudent budgeting ... no, really.

This is not going to end well.  More on that later, after a brief diversion into Bolivia’s gas nationalization.

At some point I really am going to have to start making those AFOE posts that I’ve been promising.  Too much real work, that’s my excuse.  Say ... are there any topics that I promised to blog about and never got around to?    

Bolivarians and Bolivians

Another thing that I didn't quite realize until I got to Venezuela is just how important the international dimension of the Bolivarian Revolution is to President Chávez. 

The above photo is of a speeding red jeep, of the sort that Chávez has distributed to various functionaries, with “Viva Bolivia libre” painted on the back window.  We were up in the “Country Club” neighborhood, a wealthy part of town where the government planned to build public housing until Chavista supporters started buying homes in the area.  Those plans, mysteriously, now seem to be on hold.

It was a Saturday, the day before Bolivia's recall referendum.  Chávez is deeply vested in Evo's success, and so he organized mass demonstrations in support of Evo Morales here in Caracas.  Parts of the city were a sea of red, gold, and green, and Evo supporters could be seen everywhere.  It formed a decent counterpoint to the opposition demonstration held on the same day. 

Bolivia is a member of the Alternativa Bolivariana para las Américas (aka, ALBA), along with Nicaragua, Dominica, and Cuba.  Honduras is on the verge of joining.  It isn't entirely clear what ALBA does (there's not a lot of institutional heft to it) but the Venezuelan government has vested a lot of rhetoric.  It also seems to have invested no small amount of money.  A back-of-envelope calculation from data in this Miami Herald article implies that subsidies to Cuba alone are worth around one billion dollars a year.  Information in this Reuters piece implies an even higher cost:  34 million barrels a year, worth around $4 billion, in exchange for Cuban doctors.  Chávez has given aid to Bolivia and Nicaragua under ALBA, purchased billions and billions of Argentine debt in support of the Kirchners, and finances oil purchases in the circum-Caribbean.

There are two mysteries to Chavista internationalism.  First, what's its extent?  How many resources has Caracas put into spreading Bolivarianism?  Second, what does President Chávez get out of it?  Neither one has a clear answer, but I'll take a very superficial stab at one below the fold.

26 leyes

Last weekend saw the opening of the Olympics and the outbreak of a genuine old-fashioned shooting war in the Caucasus.  Which means that the news from South America has been somewhat obscured.  I will take that as an opportunity. 

There are things that you can only really learn about a country by travelling there. I am now rather more certain both that the Revolución Bolivariana is fairly secure and that it will end badly.

On Saturday I attended an opposition demonstration that was rather poorly-attended for a country where the president had just decreed a series of reforms that had been rejected in a referendum less than nine months earlier. The big slogans were “No es no,” and “Pueblo, madura, esto es dictadura.”

The latter translates into the rather hectoring “Grow up, people, this is a dictatorship.” That’s not the slogan of an opposition that’s fired up and looking to convince people. No, that’s a cry of frustration.

More tellingly, the counter-demonstrators were good-humored and teasing, rather than angry and intimidating. “Oposición, madura, esto es locura” or “Opositores, maduran, cuanto tiempo durarán.”

Both sides had to do some violence to the proper placement of the emphasis in order to preserve the rhythm, but that’s what a good chant is all about!  Unfortunately, some of the demonstrators insisted on shouting “Pueblo, madura, esto es comunismo,” which just doesn’t work on any level.  Not when you keep strolling past branches of McDonald’s and ads for beauty creams on your way downtown. 

A bit more detail (and more pictures) below the fold.

Newsflash: another most excellent election result

Venezuelan voters just nixed constitutional reform.  This is good news.   

I have another point, though, which is that people should keep in mind that Chávez has maintained a scrupulous dedication to legality since coming to power.  I won't analyze why, but I will say that, and the fact that the man has not governed outside the law says good things about both his administration and the country.

Yeah, I said "administration," not "regime."  If the referendum had gone the other way, I might have chosen differently.  But it didn't.  And like I said, that's good news. 

Adelante, Juan Carlos, Adelante

I am not a fan of monarchy in general.  And with grandparents who fought on the losing side of the Spanish civil war, I certainly find it difficult to be much of a fan of the Spanish monarchy in particular.  Similarly, and for much more concrete reasons, I am no fan of José María Aznar. 

But I am a fan of José Luis Zapatero.  And King Juan Carlos did good facing down that coup back in '81. So much as I enjoy Hugo Chávez's bluster, I gotta give props to the King here.  It might almost be enough to make me a monarchist, were I not just so bloody American at heart.