Archive for the ‘economics’ Category

Venezuela: “Underperformance” doesn’t begin to describe it

Tuesday, October 14th, 2014

Even when the Venezuelan government has not allowed its own numbers to be verified for almost a decade, and stopped reporting various standard economoic indicators several years ago (practices which all started during Chavez’s administration), the numbers that it does report confirm The Economist’s appraisal of the country as Probably the world’s worst-managed economy.

Right now the government,

facing deteriorating economic conditions at home, is quietly slashing imports to cover foreign debt payments amid a severe hard-currency crunch.

Carmen Reinhart and Kenneth Rogoff write on Venezuela’s Spectacular Underperformance 

Maduro, of course, rules over a major oil-exporting economy that is so badly mismanaged that real (inflation-adjusted) per capita GDP today is 2% lower than it was in 1970, despite a ten-fold increase in oil prices.

The relevant reality now is the long-term plight and dwindling standard of living of the average Venezuelan citizen. Over the past 45 years, as Venezuela’s real per capita GDP fell, US per capita GDP roughly doubled and Chile’s per capita GDP nearly tripled. And neutral observers project that 2014 will be even worse for Venezuela – not surprising, given the chaos of the country’s policy fundamentals.

Venezuela repeatedly has defaulted on the moneys it owes on pharmaceutical imports, food, airlines, oil suppliers and joint-venture partners; Reinhart and Rogoff ask

historically there have been many external defaults without domestic defaults, the converse is not true: nearly all domestic defaults are “twin defaults” that also involve external creditors. Will the Venezuelan case be different?

In other words, the two things go hand in hand, and it’s only a matter of time before Wall Street bond-holders are treated like foreign airlines.

However, Francisco Toro points out that

in the technical sense that’s relevant in market terms, Venezuela is not in domestic default.
. . .
This is the crux of the Great Venezuela Macro Debate of 2013-2014: to what extent can the government’s patent inability to meet its obligations be ascribed to a basic inability to pay, and to what extent is it just the Nth insane distortion you get when the government makes it illegal to pay a penny more than 77 cents for a $10 bill?

So, while we split hairs on exchange rate misalignments and the like, Venezuela undoubtely becomes a land of political killings and gang turf wars.

Related: Venezuela: The Left vs. reality



Argentina: Hoping it’s hit rock bottom

Thursday, October 2nd, 2014

Incurable optimists are betting that Argentina has hit rock bottom:

Argentina’s economy is projected to contract by 2.1% this year and its inflation rate is among the world’s highest. In July, Argentina defaulted for a second time in 13 years. A U.S. judge on Monday found Argentina in contempt of court for its handling of the debt.

Investors see a potential turning point in presidential elections scheduled for October 2015, from which Mrs. Kirchner is constitutionally barred.

Contenders for her post have vowed to work toward exiting default and to adopt policies aimed at righting the economy.

Money managers hope to get in front of a stampede into Argentina should a new government succeed in restoring the country’s credibility in global financial markets.

Well, yeah, if I won the Power Ball I may make it to the Forbes 400.

Snark aside, Argentina has been defaulting on its debt since 1826. The country’s stock market is small, another devaluation is looming, the peso has dropped to a record low against the dollar, the country’s foreign exchange laws and business environment are negative, public spending is out of control, Steve Hanke estimates a 68% annual inflation rate, and, while yields may be high, the central bank’s reserves are dwindling and the government does not have a strategy to solve its domestic economic problems.

Oh yes, it can get worse. When the airlines don’t sell tickets more than 90 days in advance for fear they won’t get paid, you know things are not about to get rosy.

The Merval’s up. Take that as a sell signal.



Ecuador’s new fake currency

Monday, August 25th, 2014

And it’s not even bitcoin.

Mary O’Grady writes about Ecuador’s Phony Bitcoin Ploy
President Correa’s new ‘electronic currency’ will make it easier to engage in monetary devaluation.

This year Ecuador will run a fiscal deficit, including debt service, of some $9.2 billion, more than 9% of GDP. That’s what happens with budgeting that forecasts that oil prices will grow to the sky. It will be hard to shrink bloated state payrolls and subsidies, and the cost of servicing rising debt levels isn’t getting any cheaper.

To return this year to the international capital markets with a $2 billion 10-year bond, Ecuador had to pay a whopping 7.95% coupon. It also took out a $400 million three-year loan from Goldman Sachs against Ecuadorean gold to meet budget shortfalls. China holds $11 billion in Ecuadorean debt, not including billions of dollars in loans from Beijing secured by future oil shipments at an undisclosed price.

Now Mr. Correa is planning for when he runs out of other people’s money. The central bank says its new money will be a parallel currency backed up by dollars or the “equivalent” and used to pay its 500,000 bureaucrats in a “hygienic” manner. But if so, why not use dollars? In today’s world, there’s nothing special about transferring money electronically. Implying that this is a “virtual” currency is an attempt to lend Bitcoin-like cachet to what will essentially be IOUs issued by a country with a rather dodgy credit history.

And, if you think Ecuador may be a good place to retire, keep in mind that

Ecuadoreans are not free to speak against this threat to their earnings and savings. Mr. Correa is well known for using the judicial system and the army to threaten and silence his critics. Earlier this month he won the passage of a new law that makes it a crime—punishable by up to seven years in prison—to “publish, broadcast or spread” news that creates “economic panic.”

Panic indeed.

A “parallel currency backed up by dollars”? Don’t be the next Lord Crawley.

Brazil: Opposition now has Arminio Fraga

Tuesday, August 12th, 2014

Arminio Fraga, president of Brazil’s central bank from 1999 to 2002 under the Fernando Henrique Cardoso administration, is now back in the game:
Brazil Ex-Insider Returns to Help Oust President
With slow growth and high inflation hurting Brazilian President Dilma Rousseff’s chances of winning a second term, former central banker Arminio Fraga joins the opposition to persuade voters that Brazil needs a new economic steward.

Mr. Fraga appears to be positioning himself as something of an inflation whisperer. As president of Brazil’s central bank from 1999 to 2002 under the administration of President Fernando Henrique Cardoso, he helped stabilize the currency and rein in consumer prices. Mr. Fraga supports restrained public spending, tough inflation targeting and a floating exchange rate, policies that became known in Brazil as the “economic tripod.”

He is highly critical of the Rousseff administration’s decision slow inflation by capping gasoline prices and electricity rates, moves he dismissed as “gimmicks.” He’s also alarmed that Brazil’s central bank has been intervening regularly in the currency markets to prop up Brazil’s real against the dollar, a strategy he ridicules a “populist move.”

Mr. Fraga said these are stopgap measures that already are proving unworkable and that Brazil needs to focus on long-term fundamentals like increasing private investment and balancing its books.

The fact that earlier this year Standard & Poor downgraded Brazil´s long term bonds credit rating to one notch above junk doesn’t help Dilma – but you have to remember that, even when Dilma’s the candidate, Lula is the man to beat.

Ecuador: Like bitcoin, but not as solid

Wednesday, August 6th, 2014

Anyone investing in Ecuador?

Bitcoin-Like Money Is Ecuador’s Latest Dollar-Saving Plan (emphasis added):

After mortgaging most of Ecuador’s oil and gold to finance spending, President Rafael Correa is planning to create virtual money to pay the nation’s bills.

Congress last month approved legislation to start a digital currency for use alongside the U.S. dollar, the official tender in Ecuador. Once signed into law, the country will begin using the as-yet-unnamed currency as soon as October. A monetary authority will be established to regulate the money, which will be backed by “liquid assets.”

What do they mean by “liquid assets”, if it can’t be swapped for government bonds?

How reliable is Ecuador?

Less than six years after repudiating $3.2 billion of its dollar-denominated debt

And don’t forget the 1999 default.

UPDATE:
Since the “currency” is yet unnamed, I suggest we name it bullcoin.


Argentina: Cristina gives bondholders the raspberry

Friday, August 1st, 2014

As I predicted,
Argentine Leader Defies Wall Street for Main Street
Argentines awoke Thursday to find their country was once again a financial pariah after the populist President Cristina Kirchner stared down Wall Street hedge funds and pushed her country into its second default in 13 years.
Very little downside for her, since

Her refusal to settle with bondholders owed $1.6 billion could prove politically expedient in the short term: It distracts from Argentina’s slowly crumbling economy and shores up her support among many working-class Argentines who form the base of her Peronist movement, economists and analysts say.

Higher inflation, deeper recession?

Here in this sprawling capital, Argentines reacted with a mix of pride and disinterest. Pride because Mrs. Kirchner stood up to foreigners, mostly Americans and Wall Street, and disinterest because unlike the country’s record $100 billion default in 2001, this one doesn’t mean Argentina is suddenly broke and on the verge of financial collapse.

It’s all about power, folks.

UPDATE:
Stop spouting ‘half truths’ over default, US judge tells Argentina
South American country’s reaction to second default in 12 years does not alter the fact it has to pay what it owes, judge says


Argentina defaults

Thursday, July 31st, 2014

As predicted,
Argentina Declared in Default by S&P as Talks Fail

Standard & Poor’s declared Argentina in default after the government missed a deadline for paying interest on $13 billion of restructured bonds.

A US judge had set a deadline of 04:00 GMT on Thursday for a deal.

This is the eighth time the country has defaulted:

ARGENTINA’S first bond, issued in 1824, was supposed to have a lifespan of 46 years. Less than four years later, the government defaulted. Resolving the ensuing stand-off with creditors took 29 years. Since then seven more defaults have followed, the most recent this week, when Argentina failed to make a payment on bonds issued as partial compensation to victims of the previous default, in 2001.

En la fuacata!

Ecuador and the ‘straitjacket’

Thursday, July 24th, 2014

Many of you approaching retirement age may have read multiple public relations articles touting Ecuador as A Top Retire-Overseas Choice. Among the reasons listed,

– Ecuador uses the U.S. dollar meaning no exchange-rate risk for American retirees.

If that’s a reason for your relocation, don’t get packing yet: Rafael Correa has other plans,
Ecuador Weighs Escape From Dollar ‘Straitjacket’

Congress has until the end of today to vote on President Rafael Correa’s proposal to change the South American nation’s financial laws, which would allow payments in “electronic money.” Lawmakers are debating whether to insist the central bank back the new currency with a one-to-one dollar guarantee.

As a current-account deficit drains dollars from the economy, making it harder for Correa to fund a burgeoning budget gap, a new currency could be used to meet government payments, said Jaime Carrera, a former deputy finance minister and director of the Quito-based Fiscal Policy Observatory. It could also lose its value quickly if not backed by the central bank, he said.

You may recall, seven years ago

Rafael Correa said Ecuador’s economy will remain dollarized during his four-year mandate

Of course that was before he changed the constitution to allow for his “indefinite re-election.”

Much water under the bridge and many debts later,

Correa, who calls the South American country’s use of the greenback an economic “straitjacket,” has already started paying some pension obligations in government bonds, which brokers are refusing to redeem at face value.

Additionally, Correa wants to issue electronic money without explicit public guarantees.

I can’t wait for him to turn to bitcoin.

Too bad Putin didn’t include Correa in the upcoming BRICS bank.

UPDATE:
Linked to by Babalu. Thank you!

Communism at work: Give up your car

Wednesday, July 23rd, 2014

Translation: Workshop:
Maximum Socialist Efficiency
The State enterprise building
the New Economic Order

My latest article, Communism at work: Give up your car, is up at Da Tech Guy Blog.

In other related news, Maduro says he needs $15billion to rebuild the exhange system, which is the amount Hugo Chavez spent on weapons purchases three years ago.

Puerto Rico: Default

Monday, July 7th, 2014

Mary O’Grady writes, Puerto Rico’s Borrowing Bubble Pops
Moody’s measure of ‘expected default’ for Puerto Rico is higher than Argentina and Venezuela.

A Puerto Rican default should not surprise anyone. According to Carlos Colón de Armas, acting dean of the School of Business Administration at the University of Puerto Rico, for eight years from 2005 through 2012, government expenses exceeded revenues on average by approximately $1 billion annually. The dean told me by telephone that total commonwealth debt is now around $73 billion and in 2013 it was 101% of the island’s gross national product (GNP) up from 57% in June 2001. (Although gross domestic product is the most widely accepted measure of an economy’s size, it reflects the profits of large multinational corporations booked for tax purposes in Puerto Rico but not retained in the local economy. Therefore, GNP, a measure of what is produced by locals, is a more accurate tool to assess the economy.)

Unlike Luis Fortuño, the previous governor, current governor Alejandro García Padilla

increased expenses by almost $600 million in his first budget. While he is now cutting spending, the cuts are mostly from that increase, according to Mr. Colón de Armas. Some $500 million-$800 million in fat—from subsidies to special interests to funding for political parties—remains untouched in the $9.6 billion budget.

Fortuño lost by 12,000 votes since García Padilla (known as Agapito) promised the moon and the stars.

And there it goes: a certain default.

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