A Prayer to Circling Birds

Michael Gentile, Johns Hopkins University:

An evergreening dollar, a fragile oil agreement, and a constriction of economic options has brought upon a bill-collecting opportunity for Venezuela’s creditors.  On pace for 368% inflation by year’s end, Venezuela will begin 2017 with $15 billion of debt staring down a measly $10.9 billion in foreign reserves.  Their odds of default have tripped over 50-50.

To mend this pocket of theirs, better luck must come to Petróleos de Venezuela, PDVSA.  The world’s fifth largest exporter of oil and the country’s breadwinner during Hugo Chavez’ $100 per-barrel days, PVSDA is itself responsible for 35% of the nation’s public debt.  OPEC’s agreement to cut bloc oil supply is a start to its rejuvenation, but sadly its slope is more slippery than meets the eye.

OPEC’s 1.2 million barrel cut stands foremost as a model to eyeball.  History suggests OPEC agreements often overshoot their limits, and this decision was not particularly smooth.  Most troublesome: some OPEC members lack the requisite breathing room to execute it.  Two of Libya’s most vital oil terminals fell to militant forces this past summer, and civil war has depleted its other choices.  Low oil prices continue to anesthetize their economy, and Nigeria’s woes differ sparingly.  If the rest of the bloc hikes prices where some suggest, Libyan and Nigerian exporters would be irresponsible not to ramp up production and flush the market back down.  How can Venezuela be saved by its starving brothers around the world?

Even if Libyan and Nigerian oil producers cannot outstrip today’s surplus demand on their own, latent American companies can.  Unlike other nations, the United States utilizes a hierarchy, rather than a sole magnate, for its crude production, from Exxon and Chevron to various others of much more modest market capitalizations.  Many of these smaller firms scaled back their output when prices dipped and costs grew to difficult to offset.  However, with oil’s recovery, their incentives will return—and with a unique detachment from OPEC’s will.

A monetary tightening and potential fiscal stimulus on the American side has not made it easier either.  The US dollar has soared throughout 2016 and, sitting on promises of tax cuts and infrastructure spending, has not seen its cliff yet.  China, another large creditor of Venezuela’s, will also see a rise in its yuan, as its economy transitions into one of consumers and dollar outflows reach all-time highs.  Together as the world’s two largest importers of oil, China and the US will see their currency appreciations stifle oil’s rise, most literally in its nominal terms.  This is only in addition to the fact, that the Venezuelan Bolivar fell to its all time low against the dollar on Black Friday.  Today, it trades at 3,480 to the dollar and grows more expensive everyday; seen as such, Venezuela’s $4.1 billion (1.43×10^13 Bolivars) deficit transcends the means of a domestic recovery.  They need help.

Yet, above the shadows of Argentina’s 2001 default, bondholders have grown restless, none more so than today’s generation of Distressed Sovereign Credit Funds—or “vulture funds,” as their victims aptly address them.  In short, when a government can’t pay its bills, these investment managers lend them money to keep the lights on and, since the lights do need to stay on, they name their price.  Bonds, which once cost 10k, only run them 2k or 5k—mere change on the dollar.  Not to mention, with one-year interest rates that round up to one.  After some time, the debt that these lenders go long goes under.  And while the rest of the world stands in line with their receipts in their hands, the big dogs take up litigation.  In the case of Argentina, about 93% of creditors agreed to a restructuring that only paid a portion of the face value and at a later date.  However, the other 7%–our loveable vultures—declined, demanded immediate payment at full price, and held the other side ransom until Argentina satisfied them first.  The courts conceded, and certain funds profited upwards of one billion dollars.

Collective Action Clauses, or CAC’s, allow a country to restructure its debt by reaching an agreement with the controlling majority of bondholders.  A modern familiarity to government debt but a non-existence in PVSDA’s legal structure, CAC’s protect against repeats of Argentina.  A roof, if you will.   Unfortunately for Venezula, its greatest source of revenue is exposed, and blood does not tend to flow without something to pump it.  When PVSDA falls, it will remain in ruin for longer than Venezuelan supermarkets can stock their shelves, longer than the nation’s public health crisis can hold its nose, and longer than poverty can resist anarchy.

A severe crisis of extreme likelihood, like the one at hand, must be received with action, especially when it represents a repetition.  Once again, an international sovereign bankruptcy court proves a necessity, especially in a financial framework where vultures fly wild of constraint.  Venezuela needs a seat of justice, specialized in its purpose, where the greater good of its people can shine through and dictate resolution.  The loopholes of legal documents cannot be threaded without forethought of what they will sow and, if private actors cannot be entrusted to such a standard, an appointed assembly must form.  And if it is too late for Venezuela, countries like Nigeria and Libya are not far behind.

If anything, allow this issue to remind you of opportunity cost, as a founding economic concept.  How much food can be imported for the price of 50% interest?  How many people go homeless in the fourteen years that it takes for a few people, who already have riches unthinkable to a population of 30 million, to get some more?  How many countries will we have left in one hundred years, if all those who are wounded promptly receive bullets to their heads?  Yes, this struggle is distant.  Yes, it may not have been our fault to begin with.  But no, we cannot allow the people who expedite such national collapses to be the only ones who see it coming.

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