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January 22, 2015


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Interesting stuff. What will a Venezuelan default mean for Caracas' support for Caribbean, Central American and some South American countries via PetroCaribe and ALBA?

Since you're gunna call me out...

1) I've yet to be all that convinced that Venezuelan mismanagement, relative to assets and geopolitical position, and also relative to the neighboring countries is especially outrageous. People and countries are as corrupt as they can manage to be in their positions.

2)I haven't really kept up in the current economic struggles, but superficially, in merely keeping in hemispherean politics/economy, most countries are suffering from a dollar shortage. It's not as if Colombia isn't scrambling for cash to pay for it post-secondary system, for example.

3)Venezuela's import/export of goods structure makes it really difficult politically to allow the bolivar to float. I'm always amused at Palmerstinian-type liberals that think that it's possible to politically finangle this. Yeah, you *could* simply neglect everyone outside of the urban elite/middle class and do a lot of repression when you let the real wage fall outside of the protected classes. My sense is that Venezuela has more centers of power, with more material disagreements among them, than most of the other SA countries. Moreover, Venezuelan politics is centered along Chavism and traditional macho SA nationalism, in my opinion. Your choices are between Maduro, perhaps some other wily insider, or a straight-up caudillo. Insane US foreign policy that pretends that Machado and Leopoldo Lopez and the people they stand for aren't dead ducks, politically, just isn't going to work.

Mebbe I need to repeat this: No stabilization policy that does not also protect wage purchasing power (to some degree) is viable. It just isn't. Even if there isn't a serious political response, sober-minded economists have got to, for once, seriously fear and take seriously demand destruction deflation. And I think that if you do, the number of viable plans other than idiotic neoliberal nostrums are small, and require considerable finesse in their design and public salesmanship. Sure, there are a number of "stop shooting yourself in the foot" things Venezuelan policymakers can do--but my impression is that relative to the hole, it's small potatoes and longer time horizons than presently available.

4) How defaults are handled depends on the individual countries involved and their geopolitical positioning, as well as their economic positioning. Russia 1998 was handled differently than Ecuador. One was too big to be very aggressive in recovery. The other had every opportunity to pick the best time to default, and did so. MENA countries (thinking mostly of Egypt and Turkey) has backing from the GCC for geopolitical reasons, and never considered default. Next, I'm not entirely sure (like you) that Citgo is a better idea than restructured bonds. Why fight to forcibly take some external assets, with all of the legal/other costs that might entail, when you can make a simple bet, effectively on how long you were prepared to wait for oil to rebound in price?

And yes, I'm fully aware of your expertise and respectfully so, given that I read this blog.

It's not as if I *really* like trying to filter anything real from Moon of Alabama, Zero Hedge, and the like...

I have been thinking about this a lot.

Venezuela essentially needs the IMF. Venezuela's neighbors needs Venezuela to admit that they need the IMF (disordered deval destructive to them, too). There has to be a managed, carefully buffered devaluation, with whatever restructurings that can survive political contest done. There needs to be a public campaign to explain what's going on and why, and a reassurance that bad times will be kept short. In short, an overtly neutral political orientation by the IMF is mandatory, no matter how anyone feels about Chavism or its consequences. I am beginning to believe that the institutional players in USFP that control the Southern Cone portfolio are increasingly entering very dangerous territory with their continued obsession with resuscitating Copei.

Some notable ICSID awards

Gold Reserve vs Venezuela- on Sep 22, 2014, ICSID awarded GRZ $740 mm

Exxon/Mobil vs Venezuela – on Oct 9, 2014, ICSID awarded Exxon $2.1 bil

Owens Illinois vs Venezuela – on March 12, ICSID awarded OI $455 mm

Tidewater vs Venezuela – on March 13, ICSID awarded Tidewater $61 mm

Conoco vs Venezuela . . .

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