This article was published by The McAlvany Intelligence Advisor on Monday, May 7, 2018:
Former British Prime Minister Margaret Thatcher’s flippant quote: “The problem with socialism is that eventually you run out of other people’s money” misses an essential point. Socialistic government policies destroy the price mechanism that causes the economy, and thus government’s revenues, to shrink. If the government continues spend as before, it must borrow, or print. Only when these strategies fail does the government run out of other people’s money.
But it always does, as Nicolas Maduro, no student of history, apparently, is learning the hard way. For a while there it looked like socialism in Venezuela might work after all.It had its own money machine: the energy company PdVSA. Sitting on top of the world’s largest then known proven reserves, the company turned black gold into spendable currency. And spend it they did, supporting a welfare state that was touted by socialists around the world as a miracle.
Right up until the price of oil dropped, significantly impacting Maduro’s cash flow. Instead of doing the reasonable, common sense thing – cutting back on government spending – it did the opposite, setting in motion the inevitable collapse of his country’s economy. Maduro’s policies are now killing his people – infants and seniors first, the middle class later. He has run out of money (he owes $150 billion, but has less than $10 billion in specie) and his creditors are circling his carcass.
Reuters reported many of Maduro’s creditors are gathering to plot their strategy, intending to salvage as much of their investment in Venezuelan bonds as possible before the country implodes completely.
The situation was complicated by the estimate released on Saturday that PdVSA’s production is going to drop another 600,000 barrels per day this year compared to last. It’s producing at half the level of just a few years ago. So the situation which was desperate before is critical now.
And complicated. So complicated that Nick Cunningham, a journalist with OilPrice.com, asked an attorney skilled in such matters (judgment enforcement, distressed debt litigation and the like) for his view of the situation among Venezuela’s creditors. Said Wilk Auslander, aside from standing aside and letting the socialist regime collapse by itself or with outside help, “the other thing creditors can do is … declare defaults … we’re going to have a sort of cascade of creditors [who will] declare defaults … and get judgments.”
With judgments in hand, creditors then can go after assets.
Maduro has pledged anything and everything of value in the country in order to obtain the financing he needs to keep his corrupt and disintegrating government operating: oil reserves have been pledged to China and Russia, company assets have been pledged to bond holders, even oil tankers moving product to refiners in the U.S. and elsewhere have been pledged. As Auslander explained:
What you could end up with is this cascade of investors vying over different positions seeing who comes first while pursuing the assets that are outside the country.
But, added Auslander, Maduro won’t take this lying down. PdVSA is his only oxygen hose and he will claim that the creditors don’t have a valid claim, or that since his oil company is part of his government it is exempt from seizure by creditors.
When Cunningham asked Auslander, “So, then, how do creditors get paid?” he responded:
There’s not going to be any easy answer to that. I think ultimately creditors – to the extent that these defaults continue to mount – are going to say they don’t have a choice. They are going to act together and say: ‘Look, we bought these bonds, we bought these instruments, we put the money in and we are entitled to get that money [out]. We want that money.’
And they’re going to go ahead and do it [seize PdVSA assets].
That will be the death knell for Nicolas Maduro and his mad Marxist regime that has brought so much suffering to the citizens of this once-prosperous country. Not only has he run out of other people’s money, now they want it back!
The only creditor unconcerned about being paid is the international banking firm Goldman Sachs. Last year it saw an opportunity to buy some $2.8 billion worth of Maduro’s bonds at an estimated 70 percent discount. Outrage ensued, with many calling them “hunger bonds” or “suffering bonds” as they effectively extended the life of Maduro’s regime significantly. Even though Maduro hasn’t made payments due on $50 billion worth of debt since late last year, he did manage to make a $90 million interest payment to Goldman.
When the Wall Street Journal asked Goldman Sachs about the payment it received when Maduro’s other creditors were being stiffed, the banking firm “had no comment.”
Of course not. Goldman – characterized by Matt Taibbi in Rolling Stone in 2010 as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” – doesn’t stand in lines waiting to get paid. It arranges in advance to have its own separate line with itself the only one getting paid.
How appropriate is it that the best term to describe creditors lining up to pick over the bones of Maduro’s carcass is a “wake” of vultures?
Gulf-Times.com: Man who ran Venezuelan oil giant for decade predicts fast demise
The Wall Street Journal: Venezuela Is in Default, but Goldman Sachs Just Got Paid
Rolling Stone: Matt Taibbi: The Great American Bubble Machine