Wednesday, July 10, 2019

Dealing With Bad Debt

The question of how to deal with bad debt has long been a problem in Latin America. Some government or series of governments incurs debt to keep spending high, which at some point becomes unsustainable and there is political transition. The loans keep coming despite the obvious disaster because creditors assume the government will be forced to pay eventually, even if at a discount. (Though Néstor Kirchner famously gave creditors the middle finger).

As Patrice Franko writes in her excellent The Puzzle of Latin American Economic Development:

The history of Latin America contains numerous stories of a state firm's payrolls padded with dead people, construction taking place only on paper, and misguided attempts such as the Transamazonian Highway (p. 81).

It's a terrible dilemma. In most countries, with Venezuela the most current example, the debt was irresponsible and corrupt. Whatever new government comes to power feels no sympathy for the vultures who invested, but faces intense international pressure to satisfy them.

This is what Juan Guaidó is facing now. From Reuters:
Creditors holding Venezuelan debt on Tuesday pushed back on debt restructuring plans backed by opposition leader Juan Guaido, urging a "fair and effective" framework for talks and improved communications with investors holding defaulted bonds.
There is also this nugget:
The committee also took exception to the idea that debts to Russia and China would be treated differently than others.
This is where the particulars of the Venezuelan case show how it's different from, say, the 1980s debt crisis. China and Russia are propping up the Maduro government, so coaxing them away demands preferential treatment, however distasteful that might be. If they are not 100% convinced their demands will be met, they have no incentive to stop propping.

In short, all this talk is really about the political transition itself. Not only is Guaidó asserting himself as executive, he is also sending signals about upholding certain obligations. Vladimir Putin likes the status quo just because it creates trouble for the U.S., but even he wants his money.


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