RUBBLE, NEW AND OLD
Political, economic and physical earthquakes have exposed the depth of Venezuelan risk
Two major events occurred in Venezuela on Wednesday that have made vivid the scale and depth of the decapitalization of the country under Chavista rule. In the morning, the Financial Times reported, apparently in cooperation with the government of interim leader Delcy Rodriguez, that Venezuela has a much bigger foreign debt pile than markets had predicted — over $240 billion — and that it intends to restructure it quickly and without the intervention of the International Monetary Fund (IMF). Later in the day, two massive earthquakes struck the coastal region stretching from Caracas to the west, sending entire buildings crashing down across the area and knocking out the country’s electrical grid. The death toll is expected to climb into the thousands.
In tandem, these events dramatized how profoundly destructive decades of misrule have been for the country. After the pseudo-socialist and capricious government of President Hugo Chavez tore up the rule of law and nationalized the country’s energy and manufacturing bases, the obstinate and deeply hated dictatorship of Nicolas Maduro pulverized every one of the country’s economic engines as the price for holding onto power at any cost. The $240 billion external debt is only the biggest liability among those that have been tallied up; the bill being paid by the Venezuelan people for decades has been more painful and morally costly. The enormous carnage of Wednesday’s earthquakes, lain aside the largest human displacement crisis in the history of the Western Hemisphere, are simply incalculable.
What is underneath?
The history of the Chavista regime will not be kind to its tireless defenders in the annals of history. It never came close to being a convincing economic or political model for improving the lives of people in a country as rich as Venezuela once was. Instead, it was a model of systematic destruction of capital, concentration of power in the hands of an ever-shrinking elite, brutality in place of democracy and rank anti-Americanism as a state article of faith that would explain away every failing of the regime.
While some of its proponents and defenders may have been idealists, many were simply glomming onto its anti-American bluster for their own ends or getting some kind of financial incentive from the regime’s coffers. Chavismo built nothing lasting, but it destroyed a lot of the country’s foundations and all of those who enabled, championed and propagandized for it over the years have fallen quite silent for good reason. The painfully visible truth has humiliated those with an ounce of shame left.
Let’s start with the massive external debt that is almost twice as big as expected. Most of it is with investors and commercial providers, all of whom were roundly stiffed by the regime in violation of binding contracts. Private bondholders carry about $100 billion in assorted liabilities while commercial creditors and energy companies carry about half that over and above. Those who have won or are seeking arbitration awards on assets taken by the regime currently carry about $20 billion. All of these amounts are growing with interest and penalties under the binding terms the regime agreed to in order to get its hands on cash, assets or service contracts it then squandered.
The reported intention to bypass the IMF and restructure the private debt on a short timetable has been met with controversy and skepticism. The need to gain the assent of bondholders in what may devolve into a unilateral offer has never been an easy thing to do. Argentina learned that the hard way in the 2000s with its non-IMF restructuring of its massive 2001 sovereign default and holdouts succeeded in torpedoing the efforts to lock them out because international bond contracts are generally a two-way street when issued in trustworthy jurisdictions.
The regime’s anti-American allies in China and Russia, who did more to enable its destructive behavior, are also on the hook for billions in bilateral loans they expect to be repaid. Nobody was spared, it seems. We still don’t have the full picture that the interim government’s financial advisory firm Centerview Partners has uncovered, but the swath of previously unrecorded or unverified liabilities appears to stretch into dozens of billions of dollars. The FT story was the product of Centerview and the regime wanting prepare everyone for the details, given the much larger total.
And $240 billion is a staggering amount of money for a country that is an even worse version of kleptocratic inequality and injustice than what Chavez took over in 1999. The political and military elites have copiously held onto whatever is left of the wealth that was used to leverage this debt. It certainly didn’t go into maintaining a modicum of Venezuela’s infrastructure integrity for the last 27 years. The rubble in the earthquake zone is a testament to that.
Earthquakes are natural disasters but they don’t kill people. Collapsed buildings kill people. The sweeping devastation this week exposed decades of deferred maintenance, unenforced building codes and systemic state neglect that the regime refuses to account for. Venezuela modernized its building safety codes after the last major earthquake in 1967, well before the arrival of Chavismo, but many of its urban high-rises predate those laws and another update in 1982. The regime did nothing to comply. All of those buildings have spent 27 years not having improvements made to their inadequate concrete confinement, weak beam-column joints, and open ground floors used for parking or commerce that easily pancake under lateral shaking.
The very barrios where Chavismo nurtured its political base are a symbol of the extreme danger that the regime never addressed. Throughout its reign, informal barrios lacking basic engineering have swelled in density with conditions only worsening under Maduro. They expanded vertically with low-strength concrete and brittle masonry infill. Many were built on steep, unstable slopes vulnerable to landslide-induced failures.
The power stations at Planta Centro and the El Palito refinery were immediately knocked out on Wednesday. Years of hollowing out the energy grid with no investments or improvements and a lack of redundant backup systems left it in shambles. The power failure has hampered rescue efforts so severely that it is expected that many who could have been easily rescued will end up dying in place.
The most stunning observation has been the comparison of the destruction and death in the 1967 earthquake in the same region with this week’s disaster. While this quake had a magnitude of 7.5, the previous quake was at 6.6 yet its death toll was 300 and the property damage was in the range of $140 million. With the current death toll expected to reach 10,000 or more and the estimated property damage soaring well over $6 billion, the contrast cannot be chalked up to the seismic magnitude alone.
Our take:
The rubble of Chavismo that has fallen upon the Venezuelan people cannot be wholly cleaned up on a slow, bureaucratic timetable requiring consensus, lawsuits, messy debates and petty grudges. It is also not an excuse for some new form of domination to take hold that does little or nothing to rebuild the country fast enough to not prolong an already unbearable suffering.
But the old rules of the various games that govern Venezuela’s future have also fundamentally changed. The United States has long abandoned its policy of benign neglect in Venezuela, and Maduro is now in a U.S prison facing criminal charges. The interim regime is in place because recent wholesale removals of despotic regimes have gone quite badly, more for the people of those countries than anyone else. Yet the twin disasters of the debt profile and the earthquakes are about as dramatic a wake-up call as could be delivered to all the players in Venezuela’s future.
Rebuilding the country’s finances, economy and physical infrastructure was going to be far more costly than expected even before the earthquakes struck. Now there are no illusions. The difficulty in accomplishing it was also going to be far greater than imagined, and now we can all be honest with ourselves about that fact. But that cannot be met with throwing up our hands, nor with being wedded to old notions of how things must be done.
The debt restructuring will be better served by innovative approaches that might ruffle the feathers of the Washington Consensus, but might also end up reaffirming a role that the IMF could play that isn’t conventional. Their willingness to step up over and above the call of duty appears genuine, especially after the earthquake.
The governments of China and Russia, meanwhile, are not expected to agree to any significant write downs of their debts. Such good friends they turned out to be, but I’m not the least surprised. Their interest in Venezuela was at best selfish and at worst a geopolitical drag show of “brotherhood”.
The bondholders in dialogue with the interim government and Centerview have yet to be heard from at scale. How they assess the situation after this week will be a sign of how long or short the wider process will actually be. We shall see if such a massive restructuring can be achieved voluntarily without an audit first coming from the IMF or a similar technical agency outside the remit of the sovereign’s advisors. Nobody should rule it out, especially since a rapid restructuring would be much more helpful to the Venezuelan people than a long one.
The hope of restoring democracy is also riding on how well the country is rebuilt along all these critical lines. The U.S. recovery plan, articulated by Secretary of State Marco Rubio after Maduro’s ouster, is widely viewed as sound and reasonable. Even with the added misery and tasks after the earthquake, that plan is still a decent pathway to economic and political recovery. A lot more has to go right to help it move along, and many disparate players — from dogged regime holdouts to the widening universe of creditors — have to evaluate the full downside, human and otherwise, that each complication may bring.
A Note to Readers:
With U.S. Independence Day coming next weekend, I will be taking some vacation time next week and there will not be an edition published next Friday. I’ll be back at it with a new edition on Friday, July 10. To all my American friends, have a safe and happy 4th of July!