— Prof. Steve Hanke (@steve_hanke) May 6, 2016
Some were predicting default by Sept. of 2015; it’s a matter of when, not if.
Steve Hanke posts on Ricardo Hausmann Versus Nicolas Maduro
Prof. Ricardo Hausmann, a native of Venezuela and professor at Harvard, concluded in a Financial Times op-ed last week that Venezuela will go down the tubes. Indeed, Hausmann wrote that “It is probably too late to avoid a Venezuelan catastrophe altogether. But to reduce its length and intensity, the country needs to adopt a sound economic plan that can garner ample international financial support. This is unlikely to happen while Mr. Maduro remains in power.”
As Hanke points out, the country is going down the tubes, while,
I doubt if Maduro knows what the word “strategy” means.
Dawn Kissi looks at how
Venezuela flirts with default, could be worse than Argentina (emphasis added)
With inflation logging near triple-digit gains and crude oil — the lifeblood of the Bolivarian Republic’s economy — deeply entrenched in a bear market, market observers are bracing themselves for the prospect of a calamitous debt default sometime this year. Last month, Venezuelan president Nicolas Maduro used his national address on Jan. 15 to declare an “economic emergency,” augmented by a political stalemate with the country’s congress. The International Monetary Fund estimated Venezuela’s economy contracted by at least 7 percent in 2015.
More than a decade ago, Argentina’s messy collapse triggered the largest sovereign debt default in history. Venezuela’s external debt, estimated to be $185 billion, according to central bank data, is considerably more than Argentina’s 2001 default on more than $100 billion of its obligations.
Though Venezuelan debt is not widely held by private institutions, it could yet ricochet across the region. Writing in the Financial Times last week, Harvard Economist Ricardo Hausmann said that Venezuela’s political instability, a fact of life since the death of former president Hugo Chavez, could make its potential default eclipse Argentina’s 2001 debacle.
One thing is clear: Venezuela Is About to Go Bust
For years, Venezuela has had a massive budget deficit, sustained only by exorbitant oil prices. For years, analysts have been warning that the Venezuelan government would rather chew nails that allow the private sector to grow. And yes, a lot of that borrowed money was used to help establish a narco-military kleptocracy.
It is impossible to untangle the ethical implications of all of this. Lending Venezuela money is what business ethics professors talk about when they question “winning at someone else’s expense.” Losing money from investing in Venezuela is akin to losing it from, say, funding a company that engages in morally reprehensible acts. (Insert the name of your favorite evil corporate villain here).
Maduro, low international reserves, profligate spending, entrenched corruption, all the other sympyoms of the disaster boil down to ideology.
Until that changes, nothing changes.
Dollarization brought great benefits to the Ecuadorian people, as Steve Hanke (who 14 years ago was the chief intellectual architect of Ecuador’s switch to the dollar) points out,
Ecuadorians know that dollarization has allowed them to import a vital element of the rule of law — one that protects them from the grabbing hand of the State. That’s why recent polling results show that dollarization is embraced by 85% of the population.
Prof. Hanke also knows that going off the dollar will have dire consequences for Ecuador’s economy:
“If you go off, the fiscal deficit gets bigger, the level of debt gets bigger, inflation goes up and economic growth goes down. All the economic indicators just go south.”
So pres. Rafael Correa is attempting to de-dollarize, but not blatantly. How so?
Ecuador’s e-money initiative, which kicked off earlier this year after the country outlawed bitcoin, is about to see wider institutional involvement following a government directive.
The country’s banks were ordered late last month to adopt the payment system within the next year, according to a report by Pan-Am Post’s Belén Marty. The pace at which the banks are required to add support for the initiative, which is a digital representation of the US dollar – Ecuador’s official currency – depends on their size.
So it’s not even bit-coin, but it’s compulsory:
The nation’s central bank has given them 360 days to get on board, with a mandate inResolution 064-2015-M, released on May 25 in the official register.
. . .
The resolution gives a sweeping and vague definition of “macroagents” for adoption: “companies, organizations, and public or private institutions; financial institutions of the popular and cooperative system; that maintain a network of establishments available for clients and are capable of acquiring mobile money, distributing it, or converting it into varieties of money.”
Additionally, the Central Bank of Ecuador (BCE)’s crypto-currency transactions carry no privacy.
The dollar is taken out of the picture, and protection from “the grabbing hand of the State” is erased. Hasta la vista, baby!
Argentina’s bleak fiscal situation could deteriorate further over the next year, with a prominent economist telling Interfax on Monday the Latin American country’s foreign reserves could shrink to “near $10 billion” by October 2015. It would leave Buenos Aires struggling to meet payments for dollar-denominated LNG imports, which are essential to the country’s energy matrix.
“To get there [$10 billion], we would see monthly declines in reserves that were roughly similar to those of Q1 2014. It could come about through macroeconomic factors, such as the combination of a strong US dollar, weak commodity prices, and decreasing oil prices. The Saudis are squeezing their competition – especially Canadian tar sands producers – as they push for more market share. This may push down Brent crude further to $60-70 per barrel,” said Hanke.
“It’s difficult to say what will be the ‘straw to break the camel’s back’, but if you keep piling up economic problems, you create a ‘tipping-point’ situation. There’s just too much weight on everything and it gives way,” said the economist.
Trying to put a band-aid on a gashing wound, the government is trying to bring dollars into the country by forcing farmers to export soybeans held in storage even when the price of soybeans has plummeted by around 30% since April, and
Buenos Aires has resorted to making deals with friendly foreign lenders to replenish its coffers. A multibillion-dollar currency swap between Argentina and China will be launched in November, the Latin American country’s central bank chief was quoted as saying in a local paper on Sunday.
That will probably help remedy Argentina’s deeply-ingrained structural problems as well as Venezuela’s oil deals with China have in solving that country’s problems, which is to say, not at all.
. . . he hires Putin’s PR people.
Two items from Ecuador,
I’ve been hesitating to review Paul M. Barrett’s new book, Law of the Jungle: The $19 Billion Legal Battle Over Oil in the Rain Forest and the Lawyer Who’d Stop at Nothing to Win about fraudster Steven Donziger.
While the book is interesting, I find statements like “While not a materialistic person driven by financial rewards, Donziger sometimes groused about the cost of his career choices” (page 134) exasperating. Paul Barrett may believe that Donziger was not “driven by financial rewards” while setting up a Gibraltar corporation to hold proceeds of the judgment, but readers of Law of the Jungle should read Judge Kaplan’s 497-page decision, which quotes Donziger’s personal notebook on April 4, 2007:
. . . I sit back and dream. I cannot believe what we have accomplished. Important people interested in us. A new paradigm of not only a case, but how to do a case. Chevron wanting to settle. Billions of dollars on the table. A movie, a possible book.I cannot keep up with it all.
That said, Barrett is now under attack by the Republic of Ecuador’s U.S. public relations advisers, New York-based Ketchum. His article, What It’s Like to Be Attacked by Putin’s American Flack explains the latest,
Ketchum’s memo about my book connects the dots regarding why Ecuador cares so passionately about the case. Among the “difficult questions” Law of the Jungle raises, according to Ketchum:
Barrett’s book does raise many questions, among them,
• “Ecuador took the biggest part of the income obtained from petroleum extracted from the Amazon, approximately $23.5 billion against $1.6 billion for Texaco-Chevron.” The precise figures are subject to dispute, but according to government records, the split was roughly 90-10 in favor of Ecuador. This contradicts a central theme of the plaintiffs’ (and Correa’s) narrative: that Texaco derived all the benefit from industrializing the rain forest and left the host country with only the nasty side effects. The Ketchum memo warns the embassy that my reporting raises additional questions: How did Ecuador spend its majority proceeds from oil exploitation? Why wasn’t this money spent on environmental controls? Why was the money not used to help those harmed by the drilling?
Ecuador engages in “widespread repression of the media”; now they try to export the repression to our shores via a public relations firm.
The second item:
As you may recall, president Rafael Correa has come up with a fake currency to cover up a fiscal deficit, including debt service, of some $9.2 billion.
Correa claims there’s no plan to replace the dollar. Steve Hanke, who 14 years ago was the chief intellectual architect of the nation’s switch to the dollar, is skeptical,
Ecuador’s Dollarization Architect Doubts Correa’s Pledge
“What Correa’s trying to do is kind of loosen the straitjacket that dollarization has him in,” Hanke said. “If you go off, the fiscal deficit gets bigger, the level of debt gets bigger, inflation goes up and economic growth goes down. All the economic indicators just go south.”
Correa is expected to run for a fourth presidential term in 2017, having changed the law on presidential term limits.
Ketchum may be looking forward to it.
Linked to by Bad Blue. Thanks!
Prof. Steve Hanke updates on his Troubled Currencies project,
Venezuela: While the crises in the Middle East are easing, the troubles in Venezuela are far from over. The black market exchange rate for the Venezuelan bolivar has fallen from 44.03 per U.S. dollar on September 24th to 40.92 on September 30th. This represents an appreciation of 7.6% over the last week. The implied annual inflation rate as of September 30th sits at 255%, down from a local high of 292% on September 17th. The ConocoPhillips dispute, a massive blackout, and worsening shortages caused by price controls have ravaged the Venezuelans’ confidence in the bolivar over the month of September.
Although the bolivar has rebounded modestly in recent weeks, this simply indicates that the economic outlook in Venezuela is only slightly less miserable than it was in mid-September. The economy is still on a slippery slope and economic expectations continue to be weighed down by the fragile political atmosphere, worsening shortages, and the ever-present specter of political violence. An inflation rate of 255% is nothing to celebrate.
Argentina: The black market exchange rate for the Argentine peso has held steady at around 9.5 per U.S. dollar since September 25th, with a 9.55 exchange rate on September 30th. That represents a 2.9% decrease in the value of the currency from the September 22nd rate of 9.27. The implied annual inflation rate as of September 30th sits at 54%, a decrease from the rate of 49% on September 22nd.
UPDATE: Linked by Babalu. Thank you!
In his academic speech , Prof. Hanke thanked for the honor and expressed concern about the current situation in Bulgaria. He went back 15 years, to 1997, when the Bulgarian government turned to him for advice. Prof. Hanke said that then and now, the biggest problem of our country is corruption. The difference today, however, is that there is a serious shortage of hope. To get Bulgaria out of the crisis Prof. Hanke recommended the Singapore strategy to be implemented. He told the story of Singapore from the separation and independence from Britain in 1963 until today.
“Then (in 1963, editor’s note) Singapore was ranked among the poorest countries in the world, much poorer than Bulgaria today.” – Prof. Hanke said. “But there the success is attributable to investment, Singapore took a few steps that revitalized the economy – a currency board was set up for financial stability and external borrowing was carefully monitored; the market and prices were liberalized; an emphasis was put on equitable justice and internal order and all the possibilities for corruption were eliminated. And today there’s no corruption, unlike Bulgaria. “- Said Prof. Hanke.
The professor said that the crisis is an opportunity for progress. According to him Bulgaria should aim towards an economy based on knowledge and added value.
Catch his speech here.
As Venezuela approaches Zimbabwe-heights of inflation, Nicolas Maduro fired the Central Bank president: Venezuela central bank head replaced amid corruption claims. What does it mean for Venezuela’s economy? Steve Hanke explains,
Steve Hanke, a professor of economics at Johns Hopkins University in the US and chief economic adviser in the mid-1990s to the then president of Venezuela, Rafael Caldera, told CentralBanking.com that a change at the top of the central bank will be “completely irrelevant” to the problems faced by Venezuela’s economy – chief among them annual inflation running at almost 240%, according to the Troubled Currencies Project, which Hanke runs in conjunction with the Cato Institute.
Hanke said the central bank is seen in Venezuela as a fourth source of funding for the government, after oil revenues, tax collection and the bond market – none of which have the capacity to fund the level of social spending enacted by Maduro’s government, in the same vein as the late Hugo Chavez before him.
There are two ways of halting inflation, according to Hanke: a currency board, or dollarisation as has been pursued in Ecuador. A currency board would allow Venezuela to keep its own national currency, the bolivar, but would “put a hard budget constraint in the system and fix the fiscal affairs”, Hanke said, adding: “You can’t go to the central bank and have them printing money” with a currency board in place.
The corruption in the political system also stems, said Hanke, from the monetary regime. “You have exchange controls put in to conserve scarce foreign exchange reserves,” he said, “but they’re also an invitation for massive corruption and favouritism.”
“The gross profit now from the black market is around 600%,” Hanke said, “a huge incentive to try to break the system. So we know, in short, that the current monetary arrangements will require that they retain some kind of exchange controls and capital controls, and that will invite massive corruption – and it has.”
According to Transparency International, Venezuela ranks 165 out of 176 countries, placing it among the 12 most corrupt countries in the world. Rest assured the corruption will continue.