Wednesday, September 28, 2005

One more way to screw an economy 

A true accounting of how much money Venezuela has lost due to the opposition’s coup attempts and multiple strikes, not to mention the occasional rioting here and there, will probably never occur. To quantify the effects on an entire economy from multiple actions is probably impossible. But there are glimpses here and there of the scale. For example in PDVSA’s audited financial statements for 2003 to the losses from the 2002/2003 oil strike was quantified at $13 billion dollars.

In today’s Panorama there was an interesting article on another way in which the strike hurt the economy. The article was about “risk” – that is how a countries credit risk is rated and therefore how much of a premium a country has to pay on any bonds it may issue to raise funds (ie, how much it pays on its debt). Credit is rated in “basis points” with 100 points being equal to 1% of interest. That one percent interest is what a country has to pay in on top of the prevailing interest on US Treasury bonds. Say for example the risk is rated at 300 basis points and the interest on US bonds is 4%. Then that country has to pay 4% plus 3% (300 basis points equals 3%) 7% interest on any bonds it issues. If the country has a risk of 1,000 basis points then it would pay 14% interest (4% from the US bonds plus 10% for the 1,000 basis points).

The bottom line of all this is that the higher your risk as reflected in these basis points the more it costs you to borrow money. With that in mind the Panorama article pointed out that Venezuela currently has a risk of 330 basis points. So on the money it borrows it would pay about 7.3% interest. Not the best in the world but certainly not bad. By way of comparison it was pointed out that Colombia has a lower risk of 234 points while Brazil, whose economic performance is constantly talked up in the business press, has a higher risk of 353 basis points.

Now I know this is a lot of economic mumbo jumbo but here is the kicker. During the oil strike of 02/03 Venezuela’s risk went through the roof and hit 1,500 basis points. That means it would have been paying almost 20% interest on any bonds it issued to raise money. And of course, during the strike when it had very little money coming in is when they most needed to borrow. Just for the sake of argument lets say they had to issue $2 billion in bonds. At 20% interest they would have to pay $400 million dollars per year in interest. Yet if they only had to pay interest at the rate they currently pay they would only have to pay about $150 million dollars based on their current rate of 7.3%. So that would be a cool $250 million (400 million – 150 million) dollars out the window right there thanks to the opposition. Fortunately, as Chavez has gotten the economy to recover from the strike Venezuela's risk has steadily dropped.

So the next time the opposition talking heads blather on about how Chavez is wasting money on his international travels, or cleaning up a Bronx river, or giving discounted oil to poor countries you might want to ask them where their newfound sense of fiscal responsibility came from. After all, they had no problem pissing away $13 billion here, $250 million there, and God knows how much more in their various other attempts to unseat Chavez.


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