Disorderly Venezuela Default on an Argentina scale is Almost Inevitable (FT)
Ricardo Hausmann, a director of the Center for International Development at Harvard University, has written in the Financial Times that a disorderly Venezuela default, on a scale similar to the Argentina debt default crisis, is almost inevitable. To begin with, former president Hugo Chávez, who died in 2013, used the oil boom to quadruple the foreign debt which allowed him to spend as if the average price of a barrel of oil was $197 in 2012 when in fact it was only $111.
Last year was also an annus horribilis in Venezuela given that:
- GDP fell 10% following a 4% fall in 2014.
- Inflation reached over 200%.
- The fiscal deficit ballooned to 20% GDP, funded mainly by the printing press.
- The bolivar has lost 92% of its value in the past 24 months, with the dollar costing 150 times the official rate – the largest exchange rate differential ever registered.
- Shortages and long queues in the shops made daily life very difficult.
This year looks dramatically worse as imports, which were compressed by 20% last year to $37 billion, would have to fall by over 40% – even if the country stopped servicing its debt. The reason? If oil prices remain at January’s average levels, exports this year will be less than $18 billion while servicing the debt will cost over $10 billion. This leaves less than $8 billion of current income to pay for imports ($37 billion was imported last year).
Hausmann goes on to write that there are no internal or external contingency plans in place for when Venezuela defaults and it will not only be Venezuelans who get hurt:
The fallout for Venezuela’s neighbours and the global economy will be substantial. Colombia has already felt the impact of the decision taken in September by Nicolás Maduro, Chávez’s successor as president, to close the border to avoid smuggling. Exporters to Venezuela are owed tens of billions of dollars of unpaid bills.
To read the whole article, It could be too late to avoid catastrophe in Venezuela, go to the website of the Financial Times.
- Is There Progress Fighting Latin American Corruption? (Economist)
- The 15 Most Miserable Emerging Market Economies (Bloomberg)
- The World’s Biggest Sovereign Debt Defaults (CNBC)
- Venezuela is Borrowing Money at Any Cost (WP)
- New Fragile Five Facing a Forex Crisis: Argentina, Brazil, South Africa, Ukraine & Venezuela (Institutional Investor)
- Venezuela Hits Corporate Profits at These US Companies (Reuters)
- Prudent Ways to Invest in Frontier Markets (WSJ)
- Eleven Frontier or Emerging Markets Near Bankruptcy (USA Today)
- Emerging Market Companies & Governments Binge on US Dollar Debt (WSJ)
- Nomura’s Morden: Argentina Faces Risks From the Duration of Brazil Contagion (Barron’s)