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 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.