Caracas Chronicles

There’s a good reason why seasoned politicians are careful never to answer questions about hypotheticals. Trying to take positions about what you would do if something that isn’t currently the case were the case is a good way to get yourself into all kinds of trouble.

Politicians know hypotheticals sow misunderstanding, give opponents openings for attack, and generally leave you exposed for no good reason. Heck, every kid in a Venezuelan playground knows to sidestep this trap with the old saying about grandmothers and bicycles. (“If my grandmother had wheels, she’d be a bicycle”)

Ricardo Hausmann and Miguel Angel Santos fell into that trap yesterday, writing loosely towards the end of their piece yesterday about what the IMF would say to Venezuela in the hypothetical that a minimally competent macro- team materialized and turned up on 19th street asking for advice.

So, should Venezuela default on its foreign bonds? If the authorities adopted common-sense policies and sought support from the International Monetary Fund and other multilateral lenders, as most troubled countries tend to do, they would rightly be told to default on the country’s debts. That way, the burden of adjustment would be shared with other creditors, as has occurred in Greece, and the economy would gain time to recover, particularly as investments in the world’s largest oil reserves began to bear fruit. Bondholders would be wise to exchange their current bonds for longer-dated instruments that would benefit from the upturn. (emphasis added.)

At this, Bank of America’s Francisco Rodríguez pounced,

In an article published today in Project Syndicate (“Should Venezuela default?”) two top Venezuelan economists argue that Venezuela should default on its foreign debt obligations. Ricardo Hausmann, a Harvard professor and former planning minister, and Miguel Angel Santos, a Harvard research fellow, argue that the government has effectively already defaulted on the needs of Venezuelans by creating massive shortages,running up arrears and generating runaway inflation. They contend that Venezuela should enter into a debt restructuring while the country gains time to carry out oil investments. In their words,“the fact that [Maduro’s] administration has chosen to default on 30 million Venezuelans, rather than on Wall Street… is a signal of its moral bankruptcy.”

The Kid goes on to say that Hausmann and Santos are the kinds of people the opposition pays attention to, hinting that bondholders … may be safer with a Maduro government than the alternative.

I’m a big fan of FRod’s contrarian streak, which has long been a major counterbalance to the unfettered group think in so much of the opposition, but this strikes me as over the top.

Rodríguez reads RH+MAS’s flight of rhetoric, couched in the conditional, as a technical recommendation to default. It didn’t even occur to me to read it like that on my first go through, and hanging the entire attack – it feels like an attack doesn’t it?- on the word “rightly” is just doing way too much with way too little.

The economic logic at play here is worth going through: as Rodríguez sees it, the day-to-day economic chaos Venezuela is experiencing looks like a solvency crisis, but it’s really just an exchange rate crisis. The country feels like it’s run out of money, but that’s a mirage caused by the wildly misaligned exchange rate.

If that’s so, even discussing default is missing the point: you don’t shoot the mosquito feeding from your arm with a .45 when you could just as easily – more easily – swat it away with your other hand. You don’t default on your sovereign debt when you can just devalue.

For FRod, the economic logic of “exchange rate unification” (basically devaluing the official exchange rate and ending the tier system) is so overwhelming, it’ll impose itself even on the lunatics running the Venezuelan economy, no matter who those lunatics may be.

But notice that he’s locked in his own conditional, too. If the bolivar was substantially devalued then the sense of crisis would dissipate. That’s far from a consensus position. Worse, even if it’s true, I think the political signals are multiplying that there is at least one (and possibly several) veto players in the political system determined not to let it happen.

Here, the incredible opacity of the post-Chávez policy-process really hampers our ability to understand what’s going on. But it’s impossible to miss the fact that the official who had announced “exchange rate unification” as official policy has been shoved off to a non-economic role.

There are many possible ways to read Ramírez’s exit, but none – as far as I know – that see it as a sign that devaluation is coming earlier rather than later.

But Occam’s razor suggests the key veto player is the guy who thinks this is what macroeconomic policy-making looks like: as Nicolás Maduro announces he’ll spend the resources he doesn’t have to deploy another 27 thousand “inspectors” charged with cracking down on “economic sabotage,” at some point you really have to start countenancing the unthinkable: that the problem here isn’t the capacity to pay, it’s the capacity to reform.

Balking at devaluation-cum-unification, at this point, is an act of inexplicable political self-destructiveness. And that is something bondholders should be wary of.