Thursday, October 10, 2019

Pressuring Venezuelan Creditors

Mitu Gulati & Ugo Panizza, "Maduro Bonds," Duke Law School Public Law & Legal Theory Series No. 2018-56


For multiple decades, activists have sought to institute an international legal regime that limits the ability of despotic governments to borrow money and then shift those obligations onto more democratic successor governments. Our goal in this article is to raise the possibility of an alternate legal path to raising the costs of borrowing for despotic regimes. All countries have systems of domestic laws that regulate agency relationships and try to deter corruption; otherwise the domestic economy would not function. Despotic governments, we conjecture, are especially likely to engage in transactions that are legally problematic. The reason being that despotic governments, by definition, lack the support of the populace; meaning that there is a high likelihood that actions that they take on behalf of the populace can be challenged as unrepresentative and contrary to the interests of the true principals. The foregoing conditions, if one translates them into the context of an ordinary principal-agent relationship, would constitute a voidable transaction in most modern legal systems. That means that if opposition parties in countries with despotic governments today were to monitor and make public the potential problems with debt issuances by their despotic rulers under their own local laws, it would raise the cost of capital for those despots. To support our argument, we use both the concrete example of the debt issuance shenanigans of the Maduro government in Venezuela and a more general analysis of the relationship between corruption, democracy and a nation’s borrowing costs.
I don't believe I've ever seen the word "shenanigans" in an abstract. And then there is also "sleazy."
We describe how the efforts of civil society to point out suspicious looking aspects of a particularly sleazy bond issue by the Maduro government both resulted in a significant increase in the market’s perception of the risk of a particular bond issue and, we suspect, killed the willingness of investors to engage in other similar transactions. 
Loaded language aside, the argument is a simple one: opposition parties in authoritarian contexts should loudly proclaim how certain borrowing practices violate domestic law, thus raising doubts in the minds of creditors. It is public shaming, with an added threat of future complications.

One problem here is that they make specific reference multiple times to "opposition parties" but the Venezuela example they use actually involves Ricardo Hausmann, who is not in Venezuela and does not seem connected to a party, and Marco Rubio, a non-Venezuelan U.S. Senator. The body of the article never mentions anyone in a Venezuelan opposition party. This should give us pause.

So yes, you can publicly raise doubts about debt and use social media to spread your word. But basing it on U.S. officials and actors abroad raises ethical questions. It's like a public version of Richard Nixon's "make the economy scream" statement about Chile.


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