The second "conspiracy theory" explanation presented in the article seems the simplest and most plausible:
Close associates of the administration are major holders of the country’s bonds and...the government fears it’d lose their much-needed support if the payments stopped coming in. Efforts to obtain comment from government press officials on this and other aspects of the story were unsuccessful.
Either that, or debt-holding institutions are willing to kick back a fraction of coupon payments to high ranking officials as an incentive to keep the payments flowing for as long as possible before a civil war or coup forces a restructuring.
Either way, servicing the debt is keeping government officials paid to the detriment of their starving countrymen.
Venezuela is one of those classic south American countries politically. It either has a government that is extremely socialist or extremely oligarchic.
Venezuela has traditionally been governed by people tied closely to the media empires in the country. Extremely powerful and rich people that use the counter as their plaything. The poor suffer and the upper class prosper. The gap between rich and poor grows.
At some point the balance tips and you get a coup d'etat. They promise the poor that they will take care of them and fuck the rich. Slowly the country turns into a dictatorship.
The US doesn't like socialist governance in their back yard, so they look for ways to turn the screws on that country to flip it back to the rich capitalist trickle down economics ideology.
In the old days they would just send the CIA down there and have a few people assassinated, or provoke unrest and supply weapons to right wing paramilitaries.
Today it is easier to starve then out financially and since both Russia and Venezuela both truly rely on raw material resource exports, especially oil and gas, persuading OPEC to crush the price of oil has been damaging to both of the US's enemies.
In Venezuela's case, it still had huge oil reserves and cash, so the US is just playing the waiting game.
I find both typical political models in south American politics bad, but the US foreign policy doesn't help matters either way.
You're right on many points, but I feel like Venezuela is more of just an innocent (or maybe not-so-innocent) bystander in the current energy tug of war going on right now between the U.S. and Russia / OPEC. The increased tapping on U.S. natural gas reserves hasn't helped any of the smaller nations that rely on energy exports, so I don't think the U.S. is intentionally trying to destabilize Venezuela like it would have in the 70's and 80's- it's just a side effect of the current global energy industry.
During the 1990s when Nigerian brady bonds (restructured 80s-era emerging markets loans) were trading at prices in the 30s on the dollar, this was routinely cited by the sales and trading operation of the dominant brady-trading investment bank that I worked for, as a reason why they weren't defaulting... because chunks of them were held by Nigerian authority figures.
There's illegal, and then there's "illegal". You'd think with what we see in the news today you wouldn't have as many people saying public officials can't do something because it's illegal.
The problem is that law and rules may constrain officials in unexpected ways, leading to "illegal" but maybe not so bad. Officials may have "the root password" so to speak.
In this case, I think it probably would be bad, but its a haul to say that this applies here. "Maintaining access to bond markets" requires less lifting so I'd start looking there.
The current email server controversy highlights this - an appointed cabinet official may actually be subject to slightly different rules than other people. Of course this is perceived as unfair, but it might just be inherent in the system design - I don't actually know. There is emerging in security and safety culture a Fundamentalist "no exceptions" mentality. But formal systems have holes - we know this.
I tend to like the pride argument more. To default is to lose face in the international world and at home. Better to sacrifice to uphold one's promises.
A false pretense when there is little respect outside of those receiving payments beyond their borders. Perhaps they think they would be admitting defeat and that would cause the coup to occur overnight?
Interesting that you would think Maduro and his Government have any honor. How could they possibly have any face left in the International world?
Communist/Socialist Governments typically use such financial vehicles among many others to systematically remove and transfer some/most of their countries wealth into their own/friends coffers through various arrangements with financial institutions et al all the time.
Just another day and another dollar. Pride/Honor have nothing to do with any decisions when it comes to stealing billions. The human cost isn't even part of the equation.
> Communist/Socialist Governments typically use such financial vehicles among many others to systematically remove and transfer some/most of their countries wealth into their own/friends coffers through various arrangements with financial institutions et al all the time.
Oh, come on. Such activities happen the world and history over regardless of the ostensible public political veneer.
While all governments are funded by their citizen's wealth Communists almost always take it to the extreme. Read up on the aftermath of almost any communist takeover: currency exchanges, assets seizures, wage controls and/or outright murder of the former elite. The almost all the nations wealth is quickly transfered to the government/party/leaders.
Socialists practice the same - just in moderation - but it is how all governments are funded. The trick is just to not go full retard like Venezuela and kill the golden goose.
I'm not sure governments are funded by their citizenry, those citizens have to conduct commerce in the nation's currency and pay taxes in the same currency, which is solely issued by the government. It becomes more of a social relationship that way.
> Oh, come on. Such activities happen the world and history over regardless of the ostensible public political veneer.
Socialist/communist regimes are founded on a system devised to take away any and all wealth away from the people to handle it to the state, supposedly with the objective of spreading the wealth and taking care of everyone's needs.
In practice, the system takes away any and all wealth from the people, and handles it to the regime's cronies for them to use to pamper themselves as they wish.
The history of socialism repeats itself over and over again. We see it right now in Venezuela, we saw it in Brazil with the successive Worker Party's, we see it right now in Angola as well.
Whoa, haven't thought of that. Pride and honor are very distant in my spectrum of understanding. One is internal integrity, and the other is a form of social Google page rank.
There's another possibility which wasn't mentioned in the article: Maybe the government is quite happy with the food shortages. They have used control of the food supply to reward their supporters and to punish their opponents; this gives them tremendous power, and why should they give up that power just for the sake of a few million starving citizens?
Of course the food shortages affect everyone, but cperciva is right, the government is handing out bags with food in the poorest sectors of the population. When these people are faced with the food shortage, and then they receive a handout from the government, they are being controlled and manipulated.
The government has stated before that these handouts (called CLAPS) are not for the middle class (which has been opposing the government), only for the lower classes. Of course, they claim that the middle class can afford food and that they are defending the poor.
Guess what? The rapidly shrinking middle class is also suffering from the huge lines which start as early as 6pm the day before outside the supermarkets to buy a bit of food. Those of us that cannot go to the lines (because we need to work to actually afford food) need to buy in the black market (called "bachaqueros", almost always someone with govt connections) at 10x the regular prices.
We have the exact same situation with medicine. Patients are dying in hospitals because there's no medicine. Something as simple as Acetaminophen is incredibly hard to find.
I have a newborn daughter and she was supposed to get her 2 month vaccinations and I cannot find them anywhere.
I'm sorry to hear that. What has the experience been like for you to buy food? Are you stuck in the lines as well? How do restaurants obtain raw ingredients with which to cook?
Well, I've basically just been eating what I can find the easiest. I don't really go to the lines. I cannot afford to waste a whole day in a line where I don't even know what they are going to hand out or if I'm even going to be able to buy something.
I just came back from a friends place and he told me he almost got stuck in a dangerous looting situation because people got pissed because they've been in line for 10 hours and the food ran out. Plus the National Guard and the military are getting paid by black market gangs to let them cut in line and people notice that.
For example there have been long lines in every bakery to buy french bread, which is very common to eat here. I just don't eat it. Same thing with arepas, which is one of our main dishes. Since you can't get the flour (called Harina Pan) without waiting over 12 hours in line I just don't eat it. I've got some I bought from one of the black market guys some time ago but we are running out soon.
More and more stuff is getting more scarce. Rice disappeared some time ago, milk shows up every now and then. The food that you can get is extremely expensive. For example, ketchup had been missing for some time now. Suddenly it's everywhere. It used to cost around Bs.200 and now it costs Bs. 1500.
I wouldn't mind going without certain goods, but now with a baby I'm constantly worried. Diapers and formula are almost non-existent. We stocked up last year on diapers when they could still be found and the baby is doing OK right now because my wife managed to breastfeed exclusively. But not everyone is so lucky.
I don't really know how restaurants manage, I've got a friend that has a small fast food place and I know he pays some guys from a bakery for bread, and meat is already expensive so you can get that pretty easily.
But I know a hotel nearby that had to remove arepas from the breakfast menu (which was unthinkable here) because they cannot find the flour and I guess they don't want to pay black market rates.
This is the kind of thing that happens when you have a currency exchange control and price controls. Stuff gets locked in an artificial price for too long and the producers just give up.
The government tried to regulate the price of eggs. Next day, you could not find a single egg anywhere. The flour used to make arepas was regulated at an absurd price, something like Bs.30. Not even the packaging costs that.
One common misconception though, is that we cannot find any food. The basic things like rice, flour, bread, milk, etc are what's hard to find. If you've got the money and you want to go to a restaurant and get a lobster you can. But the basic stuff we used to eat every day for a reasonable price cannot be bought without going to the lines or paying black market prices. Medicines are hard to find for everyone.
Recently there was quite a commotion on the social networks because some dumbass from Europe came here to make a video for some pro-govt guys and said everything was peachy because he went to the liquor stores and found champagne, went to a gourmet market and saw foie gras, lobster and jamon serrano. But he forgot to mention he probably could not find a square of toilet paper to wipe his ass :)
Sorry for the huge wall of text and rambling. It's really hard to put my thoughts in order when I try to explain this stuff, especially in a foreign language.
Your account sounds eerily similar to what I saw happening in Zimbabwe not too-long ago. Long lines, exchange and price-controls causing shortages of basic, simple goods. Government officials getting kickbacks, then turning around and selling it on the black-market. Oh, and of course, the poor getting handouts simply so they wouldn't revolt or "vote" differently.
Really, that last part about the government-officials getting preferential treatment is probably what's playing a huge part in destabilizing the market there. They're quite-literally abusing their government-employee privilege in order to multiply their own-benefit, disregarding the fact that every time they do it, they dilute things for everyone else.
E.g. in Zimbabwe, foreign currency was very scarce. But government officials were given guaranteed monthly "allowances" at the ridiculous official (controlled) exchange rate. They then simply turned-around and sold it on the black-market at the highly-inflated rate (because of the scarcity). They "buy" at say 10 units per dollar, then turn around and sell at 100 units for each dollar. Oh, and the big reason people wanted dollars? So they could trade with the outside world. And since it was near-impossible to manufacture/create anything of value, then "buying" foreign currency with goods was next to impossible.
Have you considered leaving? Is there something tying you to staying there?
This is one of the most insightful, coherent and relevant piece of writing that I have recently read on the ground reality in Venezuela.
I found this particularly illuminating: One common misconception though, is that we cannot find any food. The basic things like rice, flour, bread, milk, etc are what's hard to find. If you've got the money and you want to go to a restaurant and get a lobster you can.
I think it's just plain old populism. They go on TV screaming about having to "defend the poor from the big bad private sectors that want to topple the government with their economic war with artificially induced high prices. The price of eggs has to be Bs.500 a carton!"
Meanwhile , just the cardboard for producing the packaging for the eggs costs Bs.200, chicken feed Bs. 300, the govt increases the minimum wage 4 times a year to fight "the economic war",etc.
Of course, anyone producing eggs is now working at a loss, so they just produce less and move part of the production to the black market.
I really have no idea what their endgame is. Maybe the idea is to actually try to finish off the private producers that are left in the country.
Thank you for sharing this. If it were up to me I'd open the boarder and let you all come to the US. Probably you just want your own country to work right though.
If that were to happen, the US border being open/closed wouldn't matter for too-long as Venezuela would close its own borders. To restrict the egress of productive citizens.
And anyway, it's not really a solution. Not everyone will ever be able to leave; if a country is going down, it will need to be fixed. And it can only really be fixed by the people of that country; the more of its people (those with skill, training, education and initiative) leave, the harder is it going to be for those who remain.
Unfortunately, people are already leaving at an alarming rate, mostly young people who see no future in the country.
The government already did a test, blocking our border with Colombia, with the excuse that products from Venezuela were being smuggled to Colombia. That does happen of course, but they also blocked the movement of people. And most international airlines are leaving the country because the government won't pay for them to repatriate their earnings in the country.
I'm trying to get my papers in order and see where I might be able to go. No one really wants to permanently leave their country, but unfortunately I don't see a future here. I don't want to be stuck here till I'm old hoping things will get better soon.
Vinegar was the only product available in most butcher/meat shops. Food, goods and petrol were rationed. https://translate.google.com/translate?hl=en&sl=pl&u=https:/... You needed special cards to be allowed to buy, not that shops actually had anything to sell.
There were very few options:
-Pewex/Baltona, special shops accepting western currency only. Meant for elites and select few allowed to travel abroad (musicians, sailors, pilots, stewards), and to drain currency from black market (prostitution, smuggling).
-black market and connections. Empty shop shelves, but there was always something under the counter for the right people.
-barter, inflation made native currency meaningless, but you could exchange your petrol cards for some meat etc.
-farming family. Every holiday ended with cars full of eggs, meat, milk, honey and spirits travelling back home.
Do you have family in rural parts of the country? This is the cheapest option for surviving such nightmare :(
We didnt need twitter, mainstream TV series (subs, alternatywy 4) and movies (mis, co mi zrobisz jak mnie zlapiesz) pretty much celebrated Polish ingenuity in the face of economic reality :/ examples:
Thanks, those videos are really bewildering. Were they commonly watched by Poles back then? Weren't such direct depiction of how things were opposed by the establishment?
There was extreme media censorship (GUKPPiW 1946-1990), but directed almost exclusively towards dissident political statements and praise of western prosperity. You were still allowed to show foreign wealth as long as you showed for example how easily Polish creativity fleeced westerners out of it. Labelling everything as a comedy also helped, still for example 'Alternatywy 4'(same director as the clips below) spend 3 years being edited/censored. Those were prime time TV shows broadcast couple of years before fall of the Iron Curtain, maybe even slightly contributing to the growing unrest and eventual Polish exit from the Eastern Bloc.
TV was not allowed to show anything celebrating western lifestyle. We didnt get Miami Vice, Wonder Years, MacGyver, A Team or Dynasty until ~5 years after kicking Russians out of our country. Instead foreign tv shows we had were 'Escrava Isaura' and some old chestnuts from the fifties like Zorro. Cinema was a lot better, scifi movies had little trouble with censorship, we got 'New Hope' in 1979, 'Empire Strikes Back' in 1982, 'Terminator' in 1985. Toho Kaiju movies came out same year as in the west. Of course you could get censored for something entirely not in the movie. 1984 'NeverEnding Story' was delayed into 1987 because of directors earlier work 'Das Boot'.
This is a government that hired militia to shoot teenagers in student protests [1]. While I don't think the food shortages were intentional, there's no doubt they are an useful tool to control the population.
This is nonsense. All things equal, they would certainly prefer a population that isn't starving to the point of revolution. That's a really fantastic way to end up with your head on a pike.
Venezuela's leaders are certainly putting their personal fortunes and their ideology ahead of the good of the people, and their economy/currency has crashed as a result. But that's quite different from twirling their moustaches as they deliberately set out to starve an entire population as a primary/intended outcome.
Because desperate people tend to do desperate things like hanging government officials from lamp posts. I agree governments like to capitalize on uncertainty, but Venezuela is way, way past the point where it works in the government's favor. If this goes on for much longer they're going to have a bona fide revolution.
I'm surprised the article did not mention the theory that they have not defaulted because of the numerous state-owned assets they possess abroad which could be seized by creditors.
"Caracas fears a default could open up claims to PdVSA assets, such as rigs, refineries and oil shipments. One target by creditors could be the company’s Houston-based subsidiary, Citgo Petroleum Corp., which has three U.S. refineries that receive hundreds of thousands of barrels of Venezuelan oil a day."
Assets are worth more to Venezuela than anyone else is willing to pay. In case of defaulting, creditors can takeover those assets cheaper than they could buy them otherwise.
Citgo was stripped of value last year by issuing bonds to pay a large dividend back to Venezuela. It is now so encumbered with debt that any remaining equity value is nominal.
Part of the reason was due to various lawsuits related to assets of US companies that had been nationalized and also to repatriate funds to support government initiatives.
If Venezuela defaulted on foreign debts, it will be very difficult (and/or expensive) to borrow again in the future.
Venezuela is essentially hedging their situation is temporary (however temporary, temporary is), and having a good economic standing in the future may depend heavily on foreign investments (particularly since Venezuela is a petroleum based economy).
Burning those bridges now could cripple Venezuela permanently.
The same question could be posed of any nation with impoverished citizens and foreign debts. We could even examine the USA, which has never defaulted, even during the height of the Great Depression.
Choosing to default on those debts and instead send temporary (and likely insignificant, once the bureaucracy runs it's course) aid to some citizens jeopardizes the entire nation. Simply put, the trade-off is not worth it.
> Burning those bridges now could cripple Venezuela permanently.
There's not a lot of evidence for this. It's not like no country has ever defaulted before, it happens all the time, and they were able to borrow again once they got themselves functional. Defaulting is bad but certainly not a death sentence.
It's especially weird when, as the article points out, bondholders are practically expecting default - and charging interest to match! At a time when it has very little cash, Venezuela is paying extra to avoid a situation that bondholders have already resigned themselves to.
> Simply put, the trade-off is not worth it.
That's not a sure thing. It could be worth it, depending on how they use the newfound money. It doesn't just have to be buying food, as important as that is. What if they use it to get some functional power plants? The massive brownouts right now are hobbling the economy; there would be much better growth prospects if people had reliable power.
> What if they use it to get some functional power plants? The massive brownouts right now are hobbling the economy; there would be much better growth prospects if people had reliable power.
Very good point. However, it's likely in order to build and maintain such infrastructure, Venezuela would need foreign investment and expertise...
If they burn all the bridges, this may not be possible to accomplish. Perhaps they could find someone willing to take on the risk, but it may cost them even more than just continuing to pay the debts and ride-out the petroleum slump.
> If they burn all the bridges, this may not be possible to accomplish
The bridges were burnt more thoroughly by Chavez's expropriation as well as his and Maduro's price-control and rationing policies. I would put a dollar in Greece or Puerto Rico before Venezuela, despite the formers having defaulted and the latter not.
Argentina had a record-setting default in 2001, and was able to reach a settlement to issue new bonds this year. There is no such thing as "permanent" in the international debt markets. Someone will eventually be willing to lend you money, at the right price.
> Argentina had a record-setting default in 2001, and was able to reach a settlement to issue new bonds this year
15 years later (and arguably not in a much better condition than before). We shouldn't pretend a nation-state default has few/zero negative ramifications.
> Someone will eventually be willing to lend you money, at the right price.
You are right... but money gets a lot more expensive. It could very well be more expensive than riding out the temporary slump (which is largely tied to the petroleum markets from my understanding).
The real question is, as usual, what's the counterfactual in the case of Argentina? If they hadn't defaulted, would they actually be better off today? It's possible that, had they tried to avoid default at all cost, the lacking fundamentals would have locked them into a downward spiral. Sometimes, a default can be a liberating blow.
(I'm not saying that default was right for Argentina back then. The point is that you haven't presented any evidence that it was wrong, either.)
The government of Argentina voluntarily took the position that they would not settle with the outstanding debt holders. They could have settled 15 years ago and regained access to international debt markets right away.
Doing so would not have made the situation much better.
To an outside investor, Argentina is a lot more risky now that they've proven they're willing to default when things get rough. That kind of risk isn't impossible to overcome, but it's very expensive. For a struggling nation without a strong economy, foreign investments can be lifeblood.
Or a noose. Debt is a double-edged sword - it all depends on if it's structured in a reasonable fashion, and if it used in a productive manner that can pay down promised future payments.
> it all depends on if it's structured in a reasonable fashion
And the ability to structure reasonable debt is contingent on perceived risk to outside investors.
If Venezuela defaults and becomes very high risk, it's unlikely future debts will be favorable towards Venezuela, impacting Venezuela's ability to climb out of the hole, so-to-speak.
Markets tend to think ahead of that. At least I think Venezuelan debt is already now very high risk; after a default, I would not necessarily think it were higher - I would look at the policies adopted by the government and think whether they are consistent and responsible.
In other words, with the current government, it doesn't really matter whether they default or not. They are not very believable in any case.
That's kind of a special case that doesn't apply anymore: Argentina didn't have a collective action clause on its debt, meaning they could not force the holdouts to take the haircut even though 93% of the bondholders agreed to it. Virtually all debt issued by developing countries, and even a lot of developed ones, now has a strong CAC specifically because of the Argentina situation.
> But Venezuela has already seized and nationalized foreign-owned assets. Surely that burnt plenty of bridges?
They seized/nationalized Exxon's assets, which certainly burnt that bridge (Exxon promptly filed for arbitration). But Exxon is only one foreign company.
Perhaps Venezuela sees a future of no foreign petroleum companies, but rather use foreign investments/loans to build their own internal petroleum operations. This seems likely after nationalizing the existing plants.
After nationalization Venezuela told all PDVSA workers that they either had to be loyal to Chavez or quit.
Many of the best left, knowing they could take positions with the supermajors or service contractors in other countries. PDVSA was left with a hodgepodge of lackeys and hacks who don't know what they're doing.
That problem is compounded by the fact that Venezuelan crude is a pain in the ass to deal with. Some of the nastiest on earth. Extremely heavy and sour (which is also why Venezuelan crude trades at a discount to the benchmarks).
>Venezuela's future will depend on and require foreign investments and expertise.
Well yes, but you seem to be assuming Maduro is rational on economic matters. But if that was so, the Venezuelan economy would not be in such a terrible mess.
Alas, it looks like the Chavez and Maduro governments are not really capable of calculating risks, or even understanding rational processes. They are completely ideological short-term opportunists.
It's starting to sound like you're one of the bond holders or securities tied to the bonds.
Exxon is consistently in the top 10 on F500, and was an absolutely critical part of bloodline. Nationalization of Exxon was the an act of desperation, the last gasp, not "just one company".
Having visited Venezuela, it is obvious there are huge problems with the state of affairs that no foreign investments are going to solve.
(Edit:identation)
From what I understand, Chavez was a marxist-socialist-nationalist who wanted to keep foreign investment out, and instituted policies that did this quite effectively, and Maduro has the same intentions.
Do you have any more information on this? I'm pretty out of the loop on the Venezuela situation and would like to know more, but don't even know where to begin.
Not sure what part of this is warrants down voting? There are valid points even if they might be a a little off the mark
Venezuela is very dependent on financing for its oil exploration and infrastructure. The reality is that they simply need to hold the fort until oil rebounds in a year or two. Otherwise a huge portion of their future oil extraction will go to financing as opposed to Venezuela. It is certainly a risk but to say the opposite is not a huge risk with serious consequences is pretty naive.
You're basically saying that Venezuelan officials understand good market and monetary policy. And yet their domestic price controls, which are the _direct_ cause of the country's current dire straits (and not the price of oil) suggests that they don't understand or accept the most basic of economic rules which even market skeptics (like Malaysia's Mahathir Mohamad, credited rightly or wrongly for Malaysia avoiding the worst of the 1997 Asian financial crisis) grudgingly accept.
So it's really quite a puzzle. I tend to think all the explanations play a part: 1) maintaining kickbacks and cash flow to powerful players, 2) keeping face wrt Chavism, and 3) ensuring that the national oil company remains (at least in their eyes) a global player.
Can you give some examples of where a country defaulted and was worse off? I think most recently Iceland defaulted and they seem to be doing alright - but maybe given it's size it doesn't really count.
Iceland didn't default. They let their commercial banks die without intervention from the government. Also known as what the US Treasury should have done in 2008. If something is too big to fail - it must be killed immediately.
> If something is too big to fail - it must be killed immediately.
No, if its too big to fail, it must not be allowed to fail -- but also must be as expeditiously as possible broken up into units which are not too big to fail.
> Kind of like gradually splitting up your giant monster truck Java thing running all your endpoints into a variety of microservices.
That's a perfectly apt analogy. "Too big to fail = must be killed immediately" is like saying if you have an Java monolith that is a SPOF for your entire business, you must immediately blow up the server running it to protect yourself from the danger of it failing later...
I am afraid you are wrong. Any entity strong enough to blackmail you into bailing it out, is strong enough to demand for the bailout to be no strings attached.
> Any entity strong enough to blackmail you into bailing it out, is strong enough to demand for the bailout to be no strings attached.
"Too big to fail" -- if they genuinely are [0] -- banks are not in a position to blackmail anyone into bailing them out; the danger of them failing is indirect effects of that failure, not actions the bank triggers if it is not bailed out -- its not blackmail. While policymakers have a strong public-interest incentive to prevent them from failing (that's literally what "too big to fail" describes), they have a similar public interest incentive to take steps to make sure that they aren't in the position to choose between similar failures and costly bailouts in the future -- and, quite often, the way that manifests is through conditions on the bailout which can extend as far as government taking control of the institution it is bailing out.
This is born out by the past history of US government bailouts of institutions that were deemed to critical to the economy to fail, many of which had management conditions attached, and some of which extended to government taking significant control of the entity for some period, and those who previously controlled the entity losing out -- the entity (itself a legal fiction created by government) was preserved, the actual people the entity belonged to were not always bailed out.
There are times when bailouts had no or weak conditions, which may be a policy failure, but clearly does not demonstrate that imposing conditions on bailouts is impossible.
[0] "Too big to fail" can also be an pretext for policy-maker favors to people with whom they have personal, social-class, or other connections, rather than a genuine fact, in which case its still not blackmail, but a whole different problem.
But you're moving the goalposts on this discussion. The question wasn't the impact on the global economy; it was the impact on the national one. So the Iceland example is directly relevant.
The reason is that the global financial institutions are arguably more important than national ones. If Icelandic banking institutions fail, their economy can still be serviced by global banking institutions.
Technically that is true for America too. American economy could be serviced by foreign banks.
However, the American banking industry is big enough to knock out the entire global financial system. Iceland's isn't. Just one bank, Lehman Brother, almost caused the whole house of cards to come down.
Part of this discussion seems to be whether or not the Treasury should have done what Iceland did, and I'm just trying to point out that they had valid reasons to do anything but that.
Well, yes, American banks were able to threaten a lot more mutually-assured destruction so as to intimidate the government into continuation of their too-big-to-fail status.
Not sure how that's an argument in favor of paying the Danegeld though.
>Not sure how that's an argument in favor of paying the Danegeld though.
Because not paying it would likely have tipped an already precarious global economy further towards depression, and that's not acceptable. So you pay the Danes off until you can actually kill them without killing yourself in the process.
Just so we're on the same page, do you understand the logic behind not paying extortionists? The "later" doesn't come, and the payment only makes them better at extorting you, and draws in more people to try the same. You typically won't get a better opportunity.
If you come up with a rationalization for how you absolutely must defer the reckoning today, why won't you come up with one tomorrow as well?
The US government could have done something about the banks after having bailed them out without wreaking havoc, but they didn't. Not because the government didn't have the power to, but because it apparently didn't have the will.
Simply letting the US banking industry collapse and take the country with it as a power play of refusal to give in to "extortion" would have been insane.
>The US government could have done something about the banks after having bailed them out without wreaking havoc, but they didn't.
That's exactly what's under dispute, especially given the multiple meanings of the term "could" here.
The problem with paying the Danegeld is (among other things) that the extortionist becomes more capable; that means it's less true that "we 'could' shut them down".
In this case, it means the banks have bought time to extend their influence, get more people to expect them to be around forever, borrow bigger amounts of money on the assumption that they can't die, make more acquisitions on the assumption of returns to TBTF status, make politicians more dependent on their campaign contributions, etc.
It's the exact mentality that "oh, they won't call our bluff because Everyone Knows that would be reckless" that allows this abuse to exist in the first place.
And what's worse, having given in, you now have to worry about non-bank orgs similarly positioning themselves!
There's a reason people have to be taught about the dangers of the Danegeld: because they all think they can just "fight for real later".
Less than 10 years out and people have already forgotten their history. That's so disheartening....
First, Lehman Brothers was allowed to collapse. That was huge and directly contradicts the revisionist history we hear about today. But it immediately became apparent that the system couldn't sustain another collapse like that.
Second, nonetheless Washington Mutual was allowed to collapse a week later.
Third, the Feds forced Bank of America to eat Merrill Lynch with patently illegal threats. But banks like operating in regulatory gray areas, and at the time were willing to take their own medicine.
Fourth, earlier that year Bank of America bought Countrywide, and since then regulators have been particularly brutal to BofA regarding Countrywide's practices prior to the acquisition.
Wells Fargo ate Wachovia. That was a good deal for Wells, but point being the Feds didn't prop up Wachovia, they just made sure it didn't crash and burn.
Citibank had to sell Bear Stearns at a loss (I think; feel free to correct me) with JP Morgan picking up substantial risk. Again, while not quite the same kind of shot-gun weeding as with Merrill Lynch, doubtless the Feds were pushy.
Fifth, while AIG wasn't allowed to collapse, the government took receivership and were relatively brutal to investors. There are still ongoing 5th Amendment Takings claims, and while morally it's repugnant the legal arguments are pretty good. Point being, it's another example where the govt didn't shirk their responsibilities in the way people claim.
Lots of other banks went under with investors losing money. You can't paint the entire banking industry as getting off scot-free just because some of the biggest (and most nimble) banks came out comparatively unscathed. As big as those banks are, the U.S. is unique in that it has a huge number of retail banks compared to any other country, and plenty of them and their investors got their comeuppance. (That history stems from the national bank debates in the late 18th and early 19th centuries, and ultimately President Andrew Jackson's resolution disfavoring a national bank. That system is still largely in place, even after the establishment of the Federal Reserve, though in the past decade it's been quickly consolidating, evolving, and becoming more tightly bound by Federal frameworks.)
There's alot more history to the financial crisis. I'm not saying things were fair, or that the banks were punished enough. My point is just that people very well understood the moral hazard at the time. Regulators did an arguably _reasonable_ job at mitigating that hazard as much as possible, even in hindsight.
Retail and transactional banking is a very integral part of modern Western civilization. The system is well over 1,000 years old (in a nearly identical form from a commercial and legal perspective) and predates all modern governments. It's organic rules are complex, opaque, and don't employ the same organizational models as modern systems like democracy, corporations, etc. You can't analyze the banking system so simplistically.
To be fair, if you are a weak medieval kingdom, militarily unable to fight off the vikings, the optimial strategy is some mix doing what it takes to stay alive while offering resistance where you can. Wessex paid Danegeld, but later won important victories. (But even later, England paid Danegeld before handed the whole country to Sweyn Forkbeard).
In the case of banks, a big problem is agency; governments and banks are co-dependent, and can evolve into a conspirancy to extract wealth from the public by whatever combination of tricks works.
Money is the main way in which modern humans collaborate to do useful work for each other. Governments and banks are both necessary for that system to function, and have co-evolved to rake off a (large!) fraction of that useful work in order to power their own operations. Neither side can afford to offend the other.
And in their situation, it helps that it was mostly the wealth of foreigners that was lost. Iceland would have been much much worse off if most of the country was involved with those banks in a meaningful manner.
Venezuela has a lot of overseas holdings [1] which, thanks to nationalization, are wholly-owned by the Venezuelan government. Those will be liquidated by creditors.
I've seen arguments that say otherwise, but there is precedent for liquidating the holdings of a government which fails to pay.[2]
The government, especially under Maduro, has done so much dumb stuff that I lean toward the stupidity explanation. The main reason there is no food / goods is they try to set the price hugely under market so no one can supply at that price. Plus a huge bunch of other similar issues.
During hyperinflation times, the Brazilian government tried to make illegal to increase prices. Obviously, people and companies could not afford, or refused to, sell at the fixed prices for long. So supermarkets went empty.
Several governments in a row tried the same idea to contain inflation, unsuccessfully. So it is not surprising that, decades later, another government is making the sames mistakes.
The article is fixated on the economic benefits of default, as if economic decisions were only ever decided by economics! Maduro's government is authoritarian and violently imposed. What internal political factors does this dictatorship think preclude the possibility of default? Would default be signaling weakness to competing forces within the country? Is humiliation on the international stage a threat to the ruling party's self image?
Violent dictatorships are seldom rational.
This article is also written with the tacit acceptance of neoliberal ideology: The only rational choice for an impoverished nation is to submit to foreign capital and governmental institutions and sell the country for the chance to become another dependent market that will bear the brunt of the next global credit crisis and coercive trade deal.
Well, they're often rational within their own framework (either an ideological framework or merely the framework of violence and power). That looks irrational to the rest of the world, but it has its own logic.
> This article is also written with the tacit acceptance of neoliberal ideology: The only rational choice for an impoverished nation is to submit to foreign capital and governmental institutions and sell the country for the chance to become another dependent market that will bear the brunt of the next global credit crisis and coercive trade deal.
Will submitting be better or worse than the current situation in Venezuela? If anyone claims that it will be worse, I'd like to see their justification for that statement.
> Will submitting be better or worse than the current situation in Venezuela? If anyone claims that it will be worse, I'd like to see their justification for that statement.
The current situation is shit. Paths forward should be judged against their alternatives and their possibilities. Global powers love that they can coerce the impoverished into decades-long deals of economic servitude and their ideology pushes it as the only reasonable way forward. Dictatorship and submission to global capitalism aren't the only options.
The state of Venezuela could not in any way be justly called representative of the people of Venezuela. I'm an anarchist, i would like to see the abolition of all states but i'm well aware that most people find that unreasonable. At the very least, no solution that involves negotiation between Maduro's dictatorship and their international creditors is a just representation of the interests of the people.
Democratic economic self-determination is alternative possibility. It may work, it may not work, but it's an option that attempts to achieve justice.
> The state of Venezuela could not in any way be justly called representative of the people of Venezuela. [snip] At the very least, no solution that involves negotiation between Maduro's dictatorship and their international creditors is a just representation of the interests of the people.
Very, very true.
Unfortunately, there's this group of thugs with guns who run Venezuela, and who aren't going to go away even though the people of Venezuela would like them to. Given that the Maduro "government" de facto exists, and refuses to quit, what should be done?
> Democratic economic self-determination is alternative possibility.
I'm not sure what you mean here. Do you mean letting the people of Venezuela vote on what should be done to rescue their economy? If so, you aren't going to get that, because step one of what needs done is getting the country out of the hands of Maduro and his crew, and Maduro isn't going to let anyone vote on whether that happens (or anything else about the management of the economy).
So far as I can see, any path forward is going to have to coerce Maduro into doing something that is anathema to his ideology. If you've got an alternative that works with the existence of Maduro, I'd love to hear it.
Having internal consistency or logic does not mean the framework is rational. If you're destroying your menas of living beyond repair, causing misery, you're irrational, even if there's internal consistency as in communist regimes
> to submit to foreign capital and governmental institutions
Wat.
Venezuela ALREADY taps the bond market for money. That's why they're sending billions of hard currency to bondholders. They're already submitting. That's the point.
For some reason Venezuela is not a problem anymore in Spain after the last elections. Conservative politicians talking louder each five minutes or so about "all is chaos and flames, crying children and vulcano lava in Venezuela", happily forget venezuelan people suffering in just one night. The theme basically vanished from both newspapers and TV since 26 june.
Perhaps things in Venezuela aren't exactly how some newspapers tell?... Who knows? All I remember for the country is that people were super-nice and the nature was gorgeous.
My guess is that Venezuela was a theme during the elections because Maduro's regime has been caught bankrolling Podemos, the anti-establishment socialist party that managed to become the second most-voted party in the last two elections.
This statement was succesively dismissed as fake in five occasions by several judges that couldn't find any proof of this. If we trust in what some spanish newspapers said, Podemos was bankrolled by Venezuela, Iran, Venezuela, Bin Laden, Venezuela, North Korea, Fidel Castro, Russia, Venezuela, Spectre and Ronald McDonald.
When a nation defaults it becomes the IMF/World Bank's bitch. "Austerity" is imposed, well-connected foreign interests get to run roughshod, and that nation is systematically (oh I mean coincidentally) looted. If you ever needed proof that these loans were designed to accomplish precisely that (a way for lenders to extract wealth from those nations), look no further than the fact that here you have an article that seems to be COMPLAINING about how Venezuela is NOT defaulting.
Well, if you put it that way, the chavista governments have been doing a tremendous job at looting the country. If defaulting means having the country looted by the IMF and friends, I'm pretty sure the citizens would rather default; I can't recall the last time the IMF ran a country down to food and medicine shortages, so they're not nearly as good at this looting thing as Maduro and his lackeys have proven to be.
> I can't recall the last time the IMF ran a country down to food and medicine shortages
Among the cases where it has been argued that IMF-driven austerity measures did that are Romania in the mid 1980s, Malawi in the early 2000s, and, most recently, Egypt earlier this decade. There are probably others.
However, compare to what would have happened in these countries without IMF intervention. That "austerity" is what happens when you run out of credit. That IMF is involved is no proof that IMF "ran down to" something.
> The next argument is something of a conspiracy theory born in part out of the opaque nature of the country’s finances. It posits that close associates of the administration are major holders of the country’s bonds and that the government fears it’d lose their much-needed support if the payments stopped coming in. Efforts to obtain comment from government press officials on this and other aspects of the story were unsuccessful.
Close associates of the administration are major holders of the country’s bonds and...the government fears it’d lose their much-needed support if the payments stopped coming in. Efforts to obtain comment from government press officials on this and other aspects of the story were unsuccessful.
Either that, or debt-holding institutions are willing to kick back a fraction of coupon payments to high ranking officials as an incentive to keep the payments flowing for as long as possible before a civil war or coup forces a restructuring.
Either way, servicing the debt is keeping government officials paid to the detriment of their starving countrymen.