The Power and the Money

The Barber of Buenos Aires cuts again

Argentina is going to get a large haircut on its debt. That was a foregone conclusion. Now, though, Covid-19 has worsened the situation. Yet for some reason Argentina has made a very generous opening offer, about what I would have expected in a world without a pandemic. I don’t know why.

The country could not have paid before Covid-19 hit; it certainly can’t pay now. So President Fernández’s finance minister, Martín Guzmán, proposed a debt restructuring that was far more generous than most economists expected.

Of course, restructuring the debt is ultimately a political decision, and economists still aren’t too good at predicting political decisions. That said, economists do think the offer is pretty generous towards creditors.

First, how generous? I came up with a back-of-the-envelope calculation for at least a chunk of the outstanding private debt. We know the following:

• The face value of that debt is going to cut from $67 billion to $63 billion, or 5.4%;
• The total interest that will be paid on that debt before its retired (or rolled over) is going to be cut from $61 billion to $23 billion;
• Coupon payments will be suspended for three years, after which they will rise slowly from 0.5% in 2023 to a maximum of 4.5%.

If you assume that the coupon rate will rise by 0.5 percentage points per year, then it is possible to estimate a flow of payments and discount that back to year zero. You can do that for the original flow of payments and the restructured flow in order to estimate the “haircut” on the debt. Of course, in order to do that you need a discount rate. What to use? You could use the current yield on Argentine debt, which is in the vicinity of 40%, but that number reflects the fact that everyone knows that the country can’t possibly repay its current debt load. You could use the rate at which most of the debt was issued at, around 7%, but that reflects the optimism of the Macri years and does not reflect the country’s likely post-restructuring situation.  

At 40%, the haircut comes to 90%! That can’t be right. At 6.7%, the haircut comes to 49%, but that waves away the fact that Argentina is riskier now. There is a lot of chatter for a 12% rate, which sounds right. Using that, you get a haircut of 60%. Which is still less than Argentina got back in 2005.

Why be so generous?

Argentina tries to stem the panic

Leticia Abad and Noel Maurer here again, reporting on some news that while not unexpected, has arrived unexpectedly prematurely. 

Imagine you are a banker in the mid-19^th century. All of a sudden, you observe more and more people demanding that your banknotes be converted to hard currency. After a couple of days, this is getting serious and you see your reserves plummeting: this is a bank run!

If the bank were in a weak position to start with, then this bank run could have been warranted. The banker will stop paying when she runs out of reserves. But sometimes bank runs are just panic for panic’s sake. Then, as a banker you could refuse to convert these notes to restore sanity, to calm people down.

Now, replace “ban”k with Argentina. The bank run is a peso run. Welcome to President’s Macri’s life.

Since the last post, our dear country has not managed to hold a steady course. The Central Bank keeps on hemorrhaging dollars and technically the country has defaulted, well, selectively, according to rating agencies.

Right now, the federal government is facing substantial payments on its dollar-denominated debt over the next few months. (See the below chart.) That means that the federal government will need to dive into the market to get dollars make the payments. (The Argentine federal government, not surprisingly, collects tax money in pesos.) That will lead to one of two things: (1) A further fall in the value of the peso against the dollar, which would be very bad; or (2) A big drain on the Central Bank reserves as the bank provides the government with the dollars it needs, which would also be very bad, since those reserves are falling fast. 

So what to do? 

Well, ask creditors to let you postpone the payments.

On August 28th, to hold on to its foreign currency reserves, the government tried short-term debt management. It unilaterally extended the payment of short-term bonds on August 28th. That lasted a day. Then the government came up with a plan for further extending repayment — or as they call it a“reprofiling.”  (Check #reperfilar for the corresponding memes).

My favorite: Reprofiling is the new “we need to talk.”

The renegotiation applies only to firms; individual creditors will receive payments as expected. This move should free up around $13.4 billions of reserves.

In other words, let’s kick the can down the road!

This strategy to ease the peso run failed quickly. The dollars kept on leaving the Central Bank’s vault.

To quell the panic, the Macri administration’s second move was the national equivalent of having the banks close their doors to depositors during a run. Capital controls ensued, first for foreign banks to repatriate profits. Then yesterday (on Sunday!) the government issued an emergency decree establishing good ol’ capital controls. All firms now require authorization to operate in foreign currency. Individuals have a cap of $10,000 per month on how much money they can change. Today will be the opposite of a banking holiday, withthe Central Bank extended banking hours until 5 pm (normally banks close at 3 pm).

President Macri decided that it’s better to adjust now when he has lots of reserves than adjust later. Will that stop the panic and make Argentine and foreign investors calm down?

It is clear that this is a last resort, as President Macri denounced capital controls during his presidential campaign. Since the primaries, he is facing an uphill battle to, at best, make it to a second election round. Hence, he is trapped between being a president and a candidate. From the quasi-populist policies announced two days after the elections to the imposition of capital controls binding for firms, he is trying to stabilize the country in hopes of attracting more votes. At the very least, he is trying to avoid to leave De-la-Rua-style — i.e., in a helicopter — before the end of his term.

All this, of course, has implications for the election and what the next president will do. Wait for the next post!

Observatorio argentino 42: nobody is suggesting another default

I am in Argentina, my favorite country among all countries. Some of you may know that Argentina is in the middle of a presidential election campaign.

Background: The two main tickets are Macri-Pichetto and Fernández-Fernández. Mauricio Macri is the current president. He dumped his previous running mate in favor of a moderate Peronist, in order to (he hopes) siphon off some Peronista votes. Alberto Fernández was the chief of staff under the Peronist presidencies of Néstor Kirchner and Cristina Fernández de Kirchner (CFK). Everyone expected CFK to run for president, but she pulled a fast one and decided to run as Vice-President with Alberto (no relation) fronting the ticket. 

The controversy: Alberto Fernández declared that he was going to finance higher pensions by halting interest payments on “Leliq” bonds issued by the central bank. A firestorm ensued ... although not in the financial markets. They did not care. But the big agribusiness head convened at the La Rural exhibition to denounce default. Pichetto announced that it would cause a currency crisis. Everybody went running for cover.

Except ... well. Here is the thing. Leliqs are seven-day bonds issued by the central bank. Fernández proposed to stop paying interest on new ones. After all, they turn over every week. He did not propose defaulting on outstanding debt.

Now, all is not well with Fernández policy. After all, it is not clear how having the central bank stop interest payments on short-term notes is going to free up money for the federal government. In addition, the central bank conducts much of its monetary policy via the issuance of Leliqs, which it uses to mop up excess liquidity. That will not really work if they pay no interest. So the idea is kinda silly.

But nobody is proposing another default.

Yet.

Why not just let the Argentine peso fall?

I wrote this almost a week ago, but forgot to hit “post.” With today’s further fall in the peso to 25 per dollar, it sadly remains relevant. So ...

Why is Argentina going to the IMF at all? Why not just let the peso fall?

Answer: currency mismatch. Argentina seems to be shot through with foreign borrowings. Some of these borrowings are hard to understand.

Other foreign borrowings are not as hard to understand. Consider the gross data on Argentine financing through international capital markets. When President Macri took office, the country regained access to foreign lending. It then proceeded to take full advantage of that new access to raise needed capital. Together the federal government, provinces, and the state-owned oil company (YPF) have borrowed about $48 billion (gross) under the Macri administration through the end of 2017. (There are credible reports that these figures may be understated by a factor of two.)

Now, I’m not saying that borrowing caused the run on the peso. Nor am I saying that it’s a huge amount for a ~$545 billion economy. But it would be rough if the capital suddenly stopped flowing, which is what would happen if the authorities just threw up their hands and let the peso plummet. Budget deficits would still need to be plugged and expiring debts would still need to be rolled over, only at much greater cost in peso terms. 

But wait it gets worse! Argentina’s financial system is heavily dollarized. That means people and businesses denominate their debts in dollars, not pesos. Why they do this is not clear: there are plenty of other countries with as checkered a monetary history, yet debts and contracts are made in the local currency. Nonetheless, many Argentine businesses write their debt contracts in dollars, even though most of them make sales in pesos. 

How serious is this problem? Well, I once again turn to the Argentine central bank. In 2016, 39% of manufacturing industry debts were in dollars, along with 37% of farm debts and 32% of service businesses. Only commerce (17%) and construction (12%) had less dollar debt … but even those numbers are pretty high. Twelve percent of construction business liabilities, the nontradable par excellence, are in foreign currencies?

Should the peso crash, those debts would become overwhelming. In fact, according to the Institute for International Finance, the situation has become a lot worse in the last two years: they report that a whopping 64% of Argentina’s combined government and corporate debt is denominated in dollars. Imagine if the value of 64% of your debts doubled over the course of a few days.

It follows that Argentine banks are exposed to depreciation. As of September 2017, 9% of bank loans were denominated in dollars, against 15% of their liabilities. The weight of those liabilities could soar if the peso crashed. Moreover, considering as most of those loans are probably to Argentine entities who earn in pesos, those dollars loans would start looking shakier as well.

In short, jacking up interest rates and going to the IMF is bad. But letting the peso just fall as far and as fast as the market will take it is also bad. It might even be worse. In other words, cry for Macri, Argentina: it is a terrible and unavoidable choice. 

How big is the threat that oil exports will be seized in a Venezuelan default?

 It is pretty clear that oil exports could be attached if PDVSA defaulted on its bonds. It would work as follows. PDVSA would sell oil to a refinery in the United States. Creditors would sue. The refinery would still get the oil, but a U.S. court would attach its payment to PDVSA and transfer it to the creditors. PDVSA, therefore, would get nothing from its exports.

If the Venezuelan government defaulted, however, the legality would get a bit dicier. It is possible that American courts would “pierce the corporate veil” and conclude that PDVSA is an instrumentality of the Bolivarian Republic, but that is not certain. Still, it is the way many investors and lawyers (inclduing myself) would bet. 

So in theory sovereign default would lead to a fall in oil prices, as exporting countries with state-owned companies cast around for alternative markets.

In practice, however, the courts are slow and (as mentioned above) the legalities are far from certain. It is quite possible that a defaulting country would merrily continue selling oil while its buyers merrily continued buying. After all, the buyers might not care. They would still get the oil; what do they care if the seller wouldn’t get its money?

But the seller would still want its money. It would likely therefore sell to middlemen who would demand a discount and then resell the oil at some legal risk to themselves. In other words, the price of oil exports would certainly go down.

The empirical question, however, given all the legal uncertainties, is how quickly it would go down. It is quite plausible that the export price of a country’s oil would not be affected by default for months or years.

Well, Ecuador provides a nice test of that question!

Let me walk you through the data. This is going to be a little chart heavy, so I ask readers to comment if it is ever unclear or you lose the chain of the argument.

Ecuadorean oil generally trades a discount to the WTI benchmark price. That is because its oil is heavier than WTI and needs to travel from Ecuadorean fields to (mostly) Californian refineries. The below chart shows the percentage discount on Ecuadorean oil between the start of 2006 and the end of 2009. It shows a very steep fall in November 2008.

That seems convincing, until you add a control. Mexico also exports heavy oil to the United States. Its discount on WTI also widened in November 2008, although Mexico did not default.

Still, the increase in the discount on Ecuadorean oil was greater than the discount on Mexican oil. Might that have something to do with the default? Certainly! But to be sure of that, you need to also account for the fact that Ecuador and Mexico sell into two different geographic markets. Ecuadorean oil goes primarily to refineries in California, whereas Mexican oil goes overwhelmingly to the Gulf Coast of the United States. The price of crude oil can vary by several dollars per barrel between the two locations, given transport costs and varying demand conditions. 

The below chart, therefore, compared the export price of the two countries’ blends to the price paid by refineries in California and the Gulf Coast (60% in Texas), respectively. Once you account for the fact that the price of oil in California fell more than the price of oil on the Gulf Coast, then the oil price dynamics in the two countries look pretty similar between 2006 and the end of 2008. This chart compares the price received by the exporting countries and the price paid by their primary customers:

 

The dynamics look similar when you express the discounts in dollar terms, rather than as percentages of the sale price. The stark increases in November 2008 go away completely, as artifacts of the general fall in oil prices. Mexican crude is a bit more volatile in the lead-up to November, but otherwise looks similar to Ecuadorean:

It is true that Mexican oil recovered faster than Ecuadorean oil. In fact, after January ‘09, Pemex managed to sell its oil for roughly the average price paid by all Gulf Coast refineries, elimating a long-standing discount. PetroEcuador also managed to improve its position relative to the pre-crisis era, but it took rather longer. 

I do not know what happened in the Gulf Coast oil market. There are two hypotheses to explain the Ecuadorean recovery, however. One is that the Ecuador announced the form of its default in mid-2009 — a form brilliantly and perfectly designed to leave creditors without legal recourse. Freed of fears of attachment, therefore, the discount fell.

The other is that May is around when PetroEcuador began selling its oil to state-owned Chinese middlemen at a significant premium. The discount on Ecuadorean oil fell because Chinese companies absorbed it. 

It is still possible, of course, that without the default Ecuadorean oil prices would have bounced back in January 2009 like Mexican ones and without the need to involve the People’s Republic of China. But there is no direct evidence for that story.

The next thing to do would be to nail down an explanation for the disappearance of the Mexican discount in January 2009. If an explanation for that can be found that Ecuador could not possibly have replicated, then the hypothesis that the Ecuadorean default affected the export price of its oil is likely incorrect. On the other hand, if the strategy employed by Pemex was one that Ecuador was prevented from using because it was in default, then the default cost Ecuador.

To be frank, my prior is that whatever happened to Mexican oil in January 2009 was likely idiosyncratic. I doubt that Ecuador suffered in oil markets for its big sovereign default.

Now, this is not to say that default would be costless for Venezuela. It could prove very costly! Eventually, Venezuelan receivables would probably be attached; sooner if PDVSA debt goes into default rather than Venezuelan sovereign debt. But in both cases Venezuela could continue to sell oil.

In short, the evidence from the Ecuadorean default of 2008 is not completely clear-cut ... but the preponderance of the evidence seems to be that any fall in oil prices will take some time to manifest.

Sources tell me that Venezuelan ministers fervently believe that default will lead to cut off in immediate oil exports, or at least a drastic fall in realized oil prices. I suspect that they are wrong ... but it is a good thing for creditors that they do not know that they are wrong.

And now for something completely different

 Venezuela! An economy in such bad shape that the Economist is now comparing it to Zimbabwe circa 2001.

The immediate question is: will Venezuela default? Ricardo Hausmann says yes. The markets say maybe. And Francisco Rodríguez says no. 

Here is the logic behind a “no.” Venezuela has $52 billion of liquidatable external assets. It has internal assets that include 7,000 tons of gold deposits, worth about $274 billion. (Admittedly, that is gold under the ground.) Moreover, while Venezuela is importing a lot, the level of those imports is due to the country’s distorted exchange rate. 

Of course, the Bolivarian Republic would default if default were costless. But it’s not. First, the country has a lot of external assets that creditors could try to seize. Second, Venezuela would run the risk that the receipts from its oil exports could be attached. According to Rodríguez, Ecuadorean oil prices fell almost 20% against Brent when that country defaulted and did not rise again until the 2009 buy-backs. He estimates that something similar happening to Venezuela could cost the country $5.2 billion per year. Third, if the price of Venezuelan oil goes back to $42, the country will be fine, and that will happen within a year or so.

If oil prices stay low, Venezuela will need to finance $25.4 billion in 2016. If they rise, those needs will drop to $20.3 billion. Either way, they can be financed, as this table shows:

2016 oil price	$ 24.9	$ 41.3
External financing needs (bn)	$ 25.4	$ 20.3
Sources of financing:
Chinese fund renewal	$ 5.0	$ 5.0
Use of existing Chinese deposits	$ 2.5	$ 1.5
Mining concessions	$ 2.5	$ 2.0
Bond swap	$ 3.1	$ 3.1
Asset-backed loans	$ 5.0	$ 3.5
Sale of Petrocaribe trade credits	$ 2.0	$ 1.0
Net bond sales	$ 0.5	$ 1.2
Change in reserves	$ 4.8	$ 3.0

Not all of these would be easy. Mining concessions means mining concessions granted by a government with a long history of expropriation. Asset-backed loans means issuing loans against assets (like Citgo refineries and stations) that might be attached in event of default. And as for the cost of default, well, I do not think Francisco is correct when he argues that Ecuadorean oil prices took a hit when the country failed to pay.

I suspect that Venezuela will avoid default his year, because it can. But in the next two posts, I will explain why it won’t be easy to take loans out against Citgo and show that Ecuadorean oil prices suffered no hit when that country defaulted. In other words, Venezuela will put off default for another year, but the costs will be higher and the benefits rather lower than Francisco calculates.

The extraterritorial British empire

 The U.K. goes a little bit further than the United States in letting people use its courts against foreign sovereigns. The basic law is laid out in the State Immunity Act of 1978. First, the British law does not require that any state-owned property must have some sort of economic connection with the activity that gave rise the underlying claim. (E.g., there is no equivalent of Section 1610(a)(2) in the British law.)

Second, in general it is a little easier to “pierce the corporate veil” and go after the assets of state-owned companies. For example, 2006 a British company went after the Congolese Republic for unpaid debts. The Congolese government tried to sell oil through the  state0owned Société Nationale des Pétroles du Congo (SNPC), which then sold it through a web of holdings. The British courts held that SNPC was an “organ of state” because:

1. The board of SNPC could delegate powers to a chairman appointed by the President of Congo;
2. SNPC had unaudited and unverifiable financing arrangements with the state; and
3. SNPC neither declared dividends nor returned profits to the state in cash. Instead it made expenditures normally made by government.

Other than maybe the first half of the third clause, that would certainly apply to PDVSA.

Now, that case did not involve sovereign debt per se, but a similar one did in 2005. That year, a British vulture fund managed to grab the revenues from Congolese oil sales. Now, the Congolese had done a good job of protecting themselves. SNPC established a subsidiary, Cotrade.  Cotrade sold oil to the Africa Oil & Gas Corporation (AOGC), incorporated in Canada. AOGC then sold the oil to a company called Sphynx, which in turn sold it to Glencore. The vulture fund successfully intercepted the money that Glencore owed Sphynx by arguing that SNPC and Cotrade had no independent existence from the Congolese state and AOGC was nothing more than a convenient front. (This is the best link for the story.) That seems rather more direct than what happened in Texas! 

Now, to be fair, a similar attempt to go after a joint venture part-owned by the government of the Democratic Republic of the Congo failed in 2012. So while easier than in America, it is not a sure thing.

Finally, there is the global Mareva injunction. British courts can freeze assets in advance of a judgment. No sneaking things out of the country here! 

I AM NOT A LAWYER! I have no idea how difficult it would be to wield these tools against Venezuela in the advent of a default. I kinda think it would be hard, since the bonds were issued under New York law and Citgo assets are in the United States. But Mareva injunctions can be global. So I suspect U.K. courts will play a role in whatever happens.

Which will be default --> legal mess --> restructuring. Hold on to your hats.

Can Venezuela’s creditors grab Venezuelan assets in a default?

 If PDVSA defaults on its debts, then yes. It would be a standard commercial dispute. Once a court made its final ruling, U.S. officials would seize Citgo shares, sell them, and give the proceeds to the creditors after deducting expenses and taxes.

But if the Bolivarian Republic defaults, not PDVSA, then it gets harder. Let’s say I own shares in a company and I default on my debts. Creditors can go after my shares in the company, but they cannot go after the company’s assets. This is true even if I am the only shareholder in the company. (Limited liability goes both ways.)

This principle applies to companies owned by foreign states. An official House of Representatives report (see footnote 185 on page 196) bluntly stated: “Section 1610(b) [of the Foreign Sovereign Immunities Act of 1976] will not permit execution against the property of one agency or instrumentality to satisfy a judgment against another, unrelated agency or instrumentality. There are compelling reasons for this. If U.S. law did not respect the separate juridical identities of different agencies or instrumentalities, it might encourage foreign jurisdictions to disregard the juridical divisions between different U.S. corporations or between a U.S. corporation and its independent subsidiary.” 

So far, so clear. Citgo is safe from creditors of the Venezuelan government. 

But here’s the thing: I can’t hide from creditors by creating a separate me-controlled firm and transferring my assets to it. In the words of the Supreme Court, “where a corporate entity is so extensively controlled by its owner that a relationship of principal and agent is created, we have held that one may be held liable for the actions of the other.” Morever, there is a “broader equitable principle that the doctrine of corporate entity, recognized generally and for most purposes, will not be regarded when to do so would work fraud or injustice.” 

In 1983, the Supreme Court specifically extended that principle to foreign state-owned entities in First National City Bank v. Banco para el Comercio Exterior de Cuba (Bancec).

Here’s the backstory. In 1960, Bancec arranged to sell some Cuban sugar to a Canadian company. Citibank issued a letter of credit to Bancec for the sugar. Bancec handed it to the Cuban central bank  (the Banco Nacional) for collection. On September 15, 1960, the Banco Nacional presented the letter to Citibank. The next day, the Cuban government nationalized all Citibank branches. (This was remarkably poor timing.) Citibank, not surprisingly, did not pay Bancec. Bancec sued in the Southern District of New York. The Cubans let the claim sit around until 1975. When they picked it again, they argued that Bancec was an independent state-owned company; why should it be liable the Cuban government’s actions?  

The case went all the way up to the Supreme Court. The Supreme Court upheld the lower court ruling: “Bancec is not a mere private corporation, the stock of which is owned by the Cuban government, but an agency of the Cuban government in the conduct of the sort of matters which even in a country characterized by private capitalism, tend to be supervised and managed by government. Where the equities are so strong in favor of the counter-claiming defendants, as they are in this case, the Court should recognize the practicalities of the transactions. . . . The Court concludes that Bancec is an alter ego of the Cuban government.”

Alright, then. Easy! It might be impossible to seize Citgo assets because Citgo is clearly not an agent of Caracas, but it might be possible to take Citgo shares away from PDVSA. After all, it would not be hard to argue that PDVSA has not been an independent commercial entity since 2002. 

So I ran this past a lawyer friend of mine who works on this stuff.

And ... oh boy ... PDVSA does not own Citgo directly. It owns it through PDV America Inc which is in turn a subsidiary of PDV Holding Inc, both incorporated in Delaware. And those two companies are not legally beholden to PDVSA. 

So now you have to show that PDVSA has no independence and that PDV Holding Inc and  PDV America Inc have no independence. That ain’t so easy. In short, Lex is too sanguine about the prospects for seizing Citgo. It could happen, and my lawyer friends think it will happen ... but only after a long delay.

But there’s another problem! Venezuela has ICSID judgments against it. Unless Venezuela pays them, then ExxonMobil and ConocoPhillips will be sniffing around those assets. Their claims rank higher than claims by bondholders, since uncompensated expropriation, unlike default, involves a clear denial of justice. 

In short, you have a mess. Sure, the fact that Citgo is there will make the Bolivarian Republic think six times about defaulting. But the economic mismanagement in that country is of such a scale (sorry, Shah8 ☺) that Caracas no longer really has any other options.  

Now, creditors have another recourse.

The creditors could go after Venezuelan oil exports directly. There is a recent history of this. In 2007, Texas courts ordered American companies to turn over not only royalties but also physical oil due the Congolese Republic. (See here and here; the decision itself is here.) Now the legal approach used in Texas did not have legs. But to be fair, the suits were quite different than the suits that might happen regarding Venezuela. 

The Venezuelans could sell their oil at the point of embarkation and try to hide it, but that opens up foreign refineries to lawsuits. With the world awash in oil, many will be behooved to avoid going anywhere near the Venezuelan stuff. 

So here is the upshot: a default will cause much pain in Venezuela but it will not make creditors whole. Having Citgo as a target does not cancel out all the problems with legal enforcement of sovereign debt because even if the creditors win it will take forever and a day to collect. But because of the legal challenges to oil sales, default be a big enough disaster for Venezuela that the country will likely make an offer that 75% of its creditors will accept. They will then abandon any attempts to go after Citgo. 

Given what Venezuelan bonds are yielding, I’m tempted to buy them. How bad could the restructuring be?

Panama backs down in the face of the Bolivarian revolution

 Many months ago, we discussed the growing confrontation between Panama and Venezuela, which cumulated in a Panamanian threat to expose the Venezuelans who were hiding their money in Panama. As of May, the new Panamanian administration had decided not to follow through. So what happened then?

Short version: the Varela administration normalized relations right after his inauguration on June 1st. No more shouting.

But what about the unpaid Venezuelan debt that started the whole thing? Well, on October 29th, Panamanian trade minister Melitón Arrocha flew to Caracas to try to hammer out a settlement. That succeeded ... in the sense that on November 18th the two countries agreed to appoint two joint working groups to negotiate payment. The markets are not reassured: Copa Airlines (which is owed about $600 million) stock took a beating. 

Meanwhile, Venezuela suffers. The number of international flights has been cut in half. And since the airlines now require payment in dollars, access to flights for Venezuelans has been reduced by even more. Meanwhile the collapse of trade with the  Colon Free Zone has contributed to Venezuela’s shortages. 

Given Venezuela’s woes, I would not expect payment in full.

Why Panama did not follow through on its threat to the Bolivarian Republic

 Panama-Venezuela relations remain at an all-time low because of the money that Venezuelans owe Panamanians. Venezuela’s capital controls are the reason the debts have not been paid. Panama responded in three ways. First, various forms of moral suasion, which are continuing but useless against the Maduro administration. Second, a case at the WTO, which is continuing but very slow. And third, a threat to publicize the moneys that corrupt Venezuelan officials have hidden in Panama ... which has sunk like a stone and disappeared.

Via Randy McDonald comes the likely reason: wealthy Venezuelans are continuing to move to Panama. Some of them are assuredly hiding money from the Venezuelan government, ill-gotten or not. Moreover, banking secrecy is the kind of thing that it is hard to half-violate without spooking clients from elsewhere. And, finally, the fact is that if the Maduro administration were going to respond to the Panamanian threat it would have already responded. Since Panama has no other real arrows in its quiver, it loses no credibility from not following through on its threat.

Plus, there is a new administration in Panama, from one of the two opposition parties. It is not bound by statements from the previous presidency. Venezuela is a scary place and an economic wreck, but it is a wreck in a very Venezuelan way. Panamanians rightfully discounted attempts to frighten them into thinking that the (conservative) opposition would create such a mess at home ... although President-elect Varela does intend to impose price controls on food. 

We will continue to bring you more news in the Panama-Venezuela spat as it continues.

Panama’s other recourse against Venezuela

The Panama-Venezuela spat is continuing. (I know, among news from Venezuela this is among the least important, but it is a big deal in Panama.) No revelations yet on the bank account front, but Panama has taken a leaf from the E.U. will sue Venezuela at the WTO. The justification is that Venezuelan capital controls are, in effect, an illegal trade restriction.

This is the same route that the European Union took against Argentina after the YPF nationalization. Brussels could not legally retaliate for the act itself, but it could throw the book at Argentina over its capital controls.

Continuing.

And Panama strikes back!

Randy McDonald asks if Panamanian creditors have any recourse against Venezuela; we answer “yes, but not very much.”

But it looks as if there is something that the Panamanian government can do: publicize secret Venezuelan bank accounts in Panama!

Let’s turn the mike over to President Martinelli’s chief-of-staff, Roberto Henríquez. “How can Maduro talk about corruption, when they have used the [Panamanian] banking center to hide fortunes? They’ve looted their country. Maduro has placed Venezuela at the service of a little group, that supports him, that controls the country through the force of arms, and much of that money is in the banking center.”

Mwa hah! It will be much fun to see what they report if the Panamanians follow through. Man, I hope they do.

For what it’s worth, it also seems that the Colón Free Zone companies have called President Maduro’s bluff: they are willing to open their books to the Venezuelan government. To quote Luis Germán Gómez, head of the CFZ merchants’ association: “We are open to investigating what has to be investigated, reviewing what needs to be reviewed, but we are also open to being paid.”

Correa lo hizo

  “Hay gente que rectifica lo que dice, hay mucha gente que se contradice.”  —René Pérez

Well, it appears that Ecuador just went and defaulted on its foreign debt.  I think that this is a bad idea.   The problem, of course, is that I am on record as supporting the U.S. decision to allow its financial protectorates in Latin America to default in 1931.  The only reason that I think Britain’s subsequent decision to default was bad is that is prevented the union of Trinidad and the United States.  I have also argued that Argentina’s much later default was a good idea. In fact, I have even implied that I think there might be good arguments in favor of an Argentine default right now.  (Really.  Read the linked post closely.  I more than imply that.) 

So why do I think that this move is stupid?  After all, Ecuador is suffering from a collapse in oil prices.  What’s the problem? 

First, Ecuador does not have to default.  Debt is around 21% of GDP, and debt service is only around 1%.  A balance-of-payments crisis this is not, even with the crash in oil prices.

Second, Ecuador is vulnerable.  I don’t know how vulnerable.  Why don’t I know?  Well, I haven’t been able to find Petroecuador’s balance sheets, so I don’t know how many American assets it holds.  Nor do I know how many commercial assets the Ecuadorean government may hold.  And I certainly don’t know how many payments to the Ecuadorean government pass through vulnerable payments centers.  But the fact that I don’t know these things make me think that the country is very vulnerable.  Call it a hunch, but a lack of transparency often means that there is something to hide.

I should point out that I have met the fellows from Greylock and Elliott who will be going after the country.  They are very very good at what they do, and they are very motivated. 

Third, Ecuador could use access to the World Bank.  It will probably lose that.  It has already lost access to Brazilian development funds. 

It could still be a bluff.  This is just a default; many stand to profit from such a thing.  The Ecuadorean government may just be engaging in a complicated political redistribution, and it will restart payments once the relevant parties have taken their profits.  Alternatively, should a second Great Depression really emerge, then early default will seem like a brilliant move. 

But short of those two possibilities — a short-term move or a prediction of disaster — it just seems unwise to me.