The Devil's Excrement

Chavez and his cronies always come up with novel economic theories. About a month or two ago, a new one claimed that inflation was not a relevant problem for the poor, because through the chain of Government owned supermarkets Mercal, they could buy everything with zero inflation.

Funny, because increased the price of 14 items of the products sold by Mercal and now the theory is turned around and it is claimed that the increases will only have a 1.4% impact on the CPI. Of course, this is the CPI that a month ago was not felt by the poor, but now that they want to dilute the effects of the new increases into it, they use it. However, others calculate that the impact is 12%.

You may be wondering how come they have to increase the prices if most things Mercal sells at imported at the official rate of exchange of Bs. 2.15 per US$? Simple, all of these products were being sold below cost and now the Chavez administration is taking the capitalistic approach of not losing money in their “socialist” enterprises.

Which only tells us that money must be very tight if the Government has decided to resort to such measures.

And, of course, to hell with our new economic theories which have a lifetime of less than two months, if that long…

It is after all, an ever improvising revolution, with no real consistency behind it.

A year ago, Venezuela’s finances looked reasonable and the probability of the country defaulting on its external debt seemed remote, despite the lack of transparency of the country’s finances. With no bond maturing until 2010 in the amount of US$ 1.5 billion and then again another one until 2011, it seemed ludicrous to talk about the country’s default.

This is no longer the case.

The Chavez Government continues to act as if oil prices had not dropped and continues to acquire liabilities, despite the fact that it has issued no debt so far in 2009. But its aggressive style is simply to not acknowledge reality and act irresponsibly. In the recent case of the Government taking over the oil service companies, the Government simply decided that it could not pay a good fraction of the US$ 13 billion owed by PDVSA contractors and took them over as if this eliminated the liabilities. But it does the opposite, as the Government now has to pay for them and much of the debt owed to them is owed in return to a long chain of their suppliers.

Thus, on top of the US$ 13 billion, the Government will have to face suits and arbitration processes that one-day will come home to roost. Add to this those processes already in hand, like ConocoPhillips, Cemex and ExxonMobil (Around US$ 12-14 billion) and the numbers add up.

Then there is the increasing debt with local banks and companies, which are owed some US$ 450 million in travel expenditures on credit cards by CADIVI and some 2 billion US$ in letters of credit. It may be in the end that the solution will be the same: take over the banks and nothing is owed in Chavez’ simplistic mind.

And the Government continues to take over institutions like Banco de Venezuela, which are unnecessary and are likely to be driven into the ground much like Banco Industrial has been bankrupted three times in the last ten years.

But this is an increasing house of cards, you pile debt on top of debt, liability on top of liability and one day the whole thing will crash.

Whether the trigger will be lower oil prices or arbitration decisions going against the Government is unclear, but unless oil process rebound dramatically in the next two years, it is likely to all come crashing down to the point that Hugo Chavez will have no recourse but to decide to default on the country’s debt.

Much like the bursting of the housing bubble in the US, the hard part is predicting when this will happen. Besides the oil price uncertainty, there is that of lowering oil production, made worse by the recent decision to take over the service companies and, of course, the fact that the Government has taken few measures to save foreign currency in the face of lower income. This will one day have to be paid.

Imagine, for example, that an arbitration decision goes against the Government, as many are likely to go and a payment of US$ 2 o 3 billion has to be made to either ExxonMobil or ConocoPhillips. It will be easier for Chavez to say forget it and stop making any payments on foreign debt and arbitrations in the name of a revolution.

This will of course create a chain of events, including the seizure of CITGO in the US which will only bring joy to Chavez as he can then say he is doing this as part of his revolutionary process and against the imperialistic and capitalistic forces of the world.

A year ago, I thought the probability of such a scenario was quite low and largely unnecessary for the Government. Even three months ago, it seemed somewhat remote. But adding the new liabilities with the oil service companies, Chavez’ increasing radicalization and the total mismanagement of the country’s economy and liabilities indicate that this probability is not only finite, but increasing day by day.

There is really no mystery to Chavez’ management style, he clearly has very little understanding of management and has total disregard for a person’s capability, knowledge or continuity in a position. Case in point is the naming of Jacqueline Farias as the new President of telephone company CANTV. Farias thus becomes the very brief Gauleiter of Caracas, spending about a month in the position to take capabilities away from Antonio Ledezma.

Clearly, Farias was barely moving into her management position, not only because she was learning the ropes, but because she had not even had the time to define it. Moreover, she is guilty of accepting a position which clearly violates the Constitution and represents her personal backing of a dictatorial and illegal decision. She should one day have to pay for it.

But even worse, Farias moves into the highly complex Presidency of CANTV, a job which requires lots of learning and management capabilities. The decisions are tough and require knowledge and experience in the area, for which Farias has none. Neither did outgoing President Socorro Hernandez, but at least she had spent some time in the position and had learned some of the ropes, if not at least some strings. Anywhere else in the world, reaching the top position at a telecom company would require either years of experience in the area or being a superb manager. Farias is neither of the two. If she retains both positions as some are suggesting then the decision is simply absurd.

But to top it all off, Chavez splits the Minister of Telecommunications and blends most of it into the Minister of Science and Technology. Of course, in Venezuela telecommunications and technology have little to do with each other, CANTV and the Government buy turnkey equipment, a la the worthless Chinese satellite or the “Vergatario” cell phone (only assembled in the country), while little is done locally to promote local engineering and/or technology.

Add to this that Chavez named a person ignorant on affairs of science and technology, Lt. Jesse Chacon, who will likely devote now his time to non-science and non-technology matters, insuring that the sector will be diminished in its importance. I always believed that Science and Technology was better off as an independent office of the Secretary of the President than a Ministry, now it has been diluted within a non-related Ministry.

We have no clue, of course, as to why Chavez made these moves. But what is clear is that the subject of illegally taking away powers from Antonio Ledezma was passe in Chavez’ mind. His political objective has been achieved, loyal Farias could be moved to a new one of his interests.

Which only indicates that Chavez has now turned his attention politically to CANTV and telecommunications. As to why, I have no idea, but it may be that he will now unleash an offensive on those companies competing with CANTV, mainly Digitel and Spain’s Movistar, which are probably making CANTV either lose market share or invest lots of money in order to stay competitive. It should not surprise anyone if Chavez decided, for example, to nationalize both in the next few weeks and he needed his two loyal, radical, political Commissars in the right place to do it.

Separately, Chavez moved CONATEL, the telecom regulator, out of the telecommunications Ministry, so that the political Commissar, Diosdado Cabello, can take over the offensive to shut down Globovision in the next few weeks.

Thus, Chavez’ management style (an oxymoronic term in the end) does not include any real world variables in it, other than moving pieces according to his political objectives. Results, efficiency, know-how, competence are irrelevant. Loyalty, radicalism, obedience and being servile are what he looks for in those that will carry his orders for each of his little whims and pet projects.

His recent moves simply show where he will be heading politically in the next few days.

And the Minister of Information and Communications in that style of respect for human rights and democracy and ignorance about the world that characterizes this Government said it just like that today that in any other country like the US (Iran?) if media owners behaved like those of Venezuela, they would receive the death penalty.

Just to prove his ignorance again, he said that freedom of expression is not an absolute and Globovision is a political party. Funny, why isn’t VTV judged by the same measure?

There is no doubt that Globovision will be shutdown in the near future and who know, why not make the death penalty legal? Anything is possible in this stupid revolution.

The Government said that it had agreed to finally buy Banco de Venezuela, an affiliate of Banco Santander and it would close the transaction on May 22nd. This is not the first time the Government claims to have closed the deal, but what is perhaps most ironic is that at the same time it was announced the Government would intervene Banco Industrial de Venezuela, the state’s largest bank, after it found “irregularities” and losses of the order of US$ 90 million.

Banco Industrial de Venezuela has been capitalized twice during Chavez’ ten years in office and one of the reason to buy Banco de Venezuela is the stupid belief that if purchased, will magically run itself well in the hands of the Government. Banco Industrial de Venezuela managed these huge losses at a time when private commercial banks are making 20-30% returns on equity despite the extreme regulation by the Government.

Thus, another one billion dollar Chavez whim is completed and you can be assured that in a couple of years Banco de Venezuela will be run with the same lack of criteria as Banco Industrial.

Another billion down the drain…

Given that so little works well in Venezuela these days, the idiotic Dictator is nevertheless looking for new places to use his ignorance for destructive purposes. Two Sunday’s ago he did such a thing, when he ordered his Science and Technology Commissar, Ly. Jesse Chacon, to tighten the screws (The nuts in Spanish, but I did not want to get into the symbolism of that!) on Venezuela’s premiere science institution IVIC (Instituto Venezolano de Investigaciones Cientificas).

Chavez asked Chacon to end “oligarchic”, “pitiyanqui” and “squalid” science and force scientists to do “useful” science for the “people” and to have them go to the barrios.

This is so stupid that it is even hard to get a handle on starting a discussion on it. First of all, there is no such thing as “useful” science, there is good and bad science, the rest are the refuge of the mediocre. If something can be deem to be useful science, it is beyond the science stage and into the development and/or technology. You can fund science in areas that are more likely to yield useful results, but you don’t know ahead of time what may or not happen.

But of course you cannot expect Dictator Chavez or Commissar Chacon to know any of this, the same way you know that Chavez has earned little about economics in the last ten years. It is the same idiocy coming into play, but now being used against an Institution whose role in Venezuela is now likely to be diminished into irrelevancy by the revolution.

IVIC is an institution dear to my heart. I owe a lot to it, not only because of what it gave me, but also because of its importance in my life as a person and as a professional. To see it in the hands of a Director who flapped like a seal applauding every word by the ignorant Dictator, as the institution’s final destruction was being ordered tells you a lot about how the low levels IVIC has already reached. Sad, very sad.

But it is even more ironic to hear Chavez attempt to construct a coherence sentence on science and technology, when it was Chavez that destroyed Venezuela’s Oil technological center INTEVEP just because it served his political purposes. In 2003 Chavez simply wiped out the world’s best heavy oil development and technology center located in Venezuela, but even worse, drove over one thousand scientists and engineer into the hands of foreign competitors, as he blacklisted them from working in Venezuela at scientific, technological and educational institutions.

Intevep was truly science and technology at the service of the people, helping the country improved and increase its oil production. It was replaced by a void that the so-called revolution has failed to even attempt to fill in the six years since that scientific genocide was committed.

And I am sure that Chavez is setting himself up for his own Lysenko to dazzle him with his discoveries and some arrogant and daring charlatan from Chavista science will become the new leader of Venezuela’s useful science.

Because ironically, Chavez inner circle has a number of scientists in it, most very mediocre, few in any areas of relevance to the country, but all cowards who are now silent as Chavez tramples what they claim to work for and believe in the years leading up to the Dictators ascension to power.

But now more than ever we are forbidden to forget these collaborators and insiders of the regime, who sold their souls and their pockets for a few coins to the autocrat, helping destroy what was once was a unique domain of excellence and achievement of which Venezuelans could be proud.

Not happy with the rate at which he has been destroying Venezuela and its institutions, Hugo Chavez has begun accelerating the pace at which he is doing it, either through ignorance or as a way of justifying the mess he himself has created by the total absence of control and management of the country.

Chavez announced last week that he would be taking over oil service companies and their assets and turn them into “social” companies. In this way, the National Guard took over drilling rigs, barges, boats and equipment that was being used to support the country’s oil production.

While Chavez argued nationalistic reasons for doing this, the true reason is that these companies are owed more than US$ 13 billion by PDVSA and many were refusing to continue their contracts until they got paid or were removing equipment from the country. Additionally, PDVSA was requesting that new contracts be signed at reduced rates and even that the service companies give PDVSA a discount on the amounts already owed.

Chavez said he would pay book vale for what was taken over, but this creates a legal and financial mess, which will take years to sort out. You see many of these boats, barges and drills do not even belong to the companies that have the contracts, but are leased from others. Thus, the equipment does not even appear in their books and there will be suits and arbitration processes that will keep lawyers working for quite a while.

Even worse, PDVSA will now absorb 8,000 workers into a company that the Government is already having troubles managing. In addition, this does very little to promote the sale of the heavy oil tracts that PDVSA wants foreign companies to buy into and provide financing for in the upcoming months. The Chavez Government has once again changed the rules on the fly, affecting the equity of these company’s shareholders. What guarantee do these large multinational oil companies have that there will be no more changes in the future? Many are now likely to have additional second thoughts

To me this is simply further evidence that Venezuela’s Dictator is simply out of control by now: In the face of the problem of the debt of the service companies, Chavez took the autocratic, expedient and simplistic solution of taking them over. This is just like a little kid playing a game that kicks the board because he is losing.

Except that the debts do not go away like the game on the little kid’s board, PDVSA can’t handle this new responsibility and the drop in oil production will not only continue to go down, but is likely to accelerate with these measures. And the debt itself does not go away either.

Because now besides the US$ 13 billion debt, there will be the compensation for their assets, which has to be added to the arbitration processes of Cemex, ConocoPhillips and ExxonMobil, as well as other takeovers that while not in arbitration have yet to paid for.

Thus, Chavez continues to dig Venezuela into a hole in order to protect himself from the realities of the drop in oil prices and the crisis that is already developing in our country. By now, only a dramatic jump in the price of oil can cover up a decade of mismanagement and the results of the irresponsible whims and decisions of Hugo Chavez.

One way or the other, with or without Hugo Chavez, it is Venezuelans that will one day have to pay for all of these decisions. And even more than before, the poor will be worse off in the end that Chavez’ much hated oligarchs.

I will once again be silent for a few days as I leave Budapest, but I can’t help but write a brief note on what is definitely the most absurd thing to come our way in a while: The Government will investigate Globovision for its reporting of the earthquake last week and if sanctioned, could shut down the TV station for 72 hours or completely. 

Globovision reported the tremor (conspiracy?) and noted that the webpage of Funvisis, in charge of seismic research in Venezuela was down and there was no information from the Government. (The same was true last month when a tremor hit Caracas on a Saturday afternoon, I had to use information from the US)

According to the investigation, Globovision created “fear” and “panic” with its report of the physical event, but of course people were avid for information as VTV showed a pre recorded Chavez tirade at 5 AM that morning.

What Globovision did was to use data from the US Geological service and note that it was a strong earthquake from a fault that had been dormant. 

I guess soon,the media will not be able to  report shortages, rain, floods or crime…

What a stupid revolution!

(Imagine if Globovision, or any other media outlet dared to report on Chavez’ “other”, “great”, “Science” and “Technology” project, the overpriced Simon Bolivar satellite, wobbling in orbit as a symbol and monument of the stupidity and ignorance of the revolution)

As I look at the effects of decades of communist rule in Bratislava, I can’t help but wonder what the results of years of the Chavista will be in our battered country. Hopefully our music will not become as sad as the Slovakian folk songs I have heard (above) nor our look as drab.

But I am not here for political enlightenment, but to disconnect, a task which is made harder by the earth deciding to shake so hard that I get phone calls at 5 AM from Caracas that scare the hell out of me, but were somewhat aimed at getting some comfort . Which I give, but I have no basis for, as the fault that produced Monday’s tremors had been dormant for quite a while and while never responsible for a big quake, it could unsettle more “traditional” faults in the North. But tell that t the revolution as the newly minted Minister of Science and Technology Jesse Chacon, recycled through many Cabinet positions, uses the opportunity to cal the people with information gathered from who knows whom and says that having a tremor stronger than the 5.4 on Monday would be a one thousand year phenomenon and the aftershocks are “natural”.

An irresponsible statement, as unjustified as Mr. Chacon being Minister of Science. Because Caracas is surrounded by faults known to induce a 6-plus earthquake every sixty years on average, which would destroy Mr. Chacon’s statistics easily, Of Course, Chacon is likely to be crossing his fingers as he makes these outrageous statements, hoping that he will never have to justify his mistake. And even if he were shown to be wrong, it would not be a problem as the revolution would find a way to blame the opposition, God or whomever, but never the process itself.

We are after all reassured that the country has the most modern equipment to monitor the tremors, but that is all that can be done, monitor after the fact, and even in that US geophysical services were faster and more precise to tell us where and what happened in the early hours of Monday.

And I also stay connected because my infamous Bolivar credit card stopped working this weekend, a fact communicated to me by many friends. I can’t complain about a system that I abhor, but I don’t suffer much from it, I do have other credit cards to complete my trip with. But how many Venezuelans were left out there stranded by the irresponsible policies of CADIVI? They travelled believing that they had a precise amount of money to use, but were cut dry in the middle. Whether fair or unfair is not the question. The question is whether any system should have such a random and chaotic factor associated with it. Of course, most that travel are the rabid anti-Chavistas, so why bother at all in any case.

And I also hear that in a country where confrontation between the Government and unions is on the rise after a repressive may 1st. celebration, a high ranking Toyota union leader was killed today. Another mystery never to be solved by a Government that intimidates its enemies and never is capable in finding out who the intimidators were.

And thus, even as I disconnect, the ties remain, the links are there, the never ending presence of a fake revolution that never lets you sleep in peace even if you are in Bratislava.

Rumors are rampant that PDVSA will issue a two-year zero coupon bond which would be sold to local investors for local currency. The issue would attack two problems: One, it will give PDVSA local currency to pay off contractors, suppliers and salaries. Two, it will supply the parallel market with US$ 2.5 billion and will help hold it down for a while.

While Minister of Finance Rodriguez denied that PDVSA had the authorization to do it, there has to be some truth to it, because some parts of it make sense. For example, making it a zero coupon is sensible, as this means that the company will have no interest costs. Two years makes some sense, but three would be best. Why? This bond, if true, would mature in 2011, but there is already a maturity for one of the country’s bonds in 2011, for US$ 1 billion that year, that would mean that US$ 3.5 billion in Venezuela and PDVSA bonds would be due that year. Fine if oil prices bounce back, but no so great if they don’t. So, 2012 would be best.

But once one gets into the details, things get murkier. Foreign investors prefer sovereign risk than PDVSA risk. Thus, while at first sight a yield of 14-15% might be what investors would demand, it may be higher initially. The second problem is that it is likely not to have much of an impact on the swap market right now, except for the psychological impact initially. This is because US$ 2.5 billion is likely to be sold in little pieces to thousands of small “investors’, which does not attack the problem of corporates that need foreign currency for imports. Thus, the bonds will likely end in the hands of those looking to make some money, rather than satisfy the swap market needs. Moreover, those same corporates have needs that exceed the US$ 2.5 billion anyway.

What would seem to make more sense is to say the country (not PDVSA) is buying back the 2010’s and issuing US$ 4 billion of longer terms bonds with a low coupon. But clearly this is not what the Government is thinking. It would certainly be a strange transaction, if true, as a zero coupon issued by PDVSA. Think about it, suppose the Government wants to sell the bonds at an implicit swap rate of Bs. 4.3, which is what optimists are saying in Caracas. Then, let’s say the bond would sell in world markets at 70% of its nominal value, to give a yield of 13-14% more or less. Then, this would mean that it has to be sold to local investors at 140-150% of its nominal value. That is, if you buy a million dollars, you pay (1.4 x 2.15)=3.01 million Bolivars for it. But once you have the bond you sell it for (0.7 x 1 million or 700,000 dollars which means you pay 4.3 Bs. (3.01/0.7) for each dollar you get. I wonder how may bonds have been sold in a primary market with such a premium in history. If PDVSA sold them at an implicit rate higher it would have to be even higher. Weird no?

I hope my numbers are right, I don’t even want to use a calculator on my vacation and doing things from memory.

And speaking of numbers, how about Mathematician Nelson Merentes becoming Head of the Venezuelan Central Bank? Chacon is Minister of Science and Merentes President of the Central Bank, it’s hard for things to get weirder than that. When I met Merentes in the 90’s he had no clue what a spread was, I do hope he reads my post on Central Banks in early February and knows his is bankrupt and what it means.

And since we are on the subject of bond, the revolution that claims to defend the country’s sovereignty so well, approved yesterday, via the National Assembly, that bonds can be issued with collateral of Government property. This would be a first. Supposedly, this is being done so that CVG, the corporation that manages companies in Guayana, can issue bonds guaranteed by its gold production. Truly amazing when you think about it, CVG does not even have audited financial statements.

It is indeed a revolution, a clueless one at that.