When restructuring Venezuela’s debt, start with identifying all odious credits.

Colby Smith writes “analysts reckon Venezuela has some $140bn debt outstanding with over $65bn owed to bondholders and another roughly $40bn due to China and Russia.” “Venezuela’s welter of debt will mean a messy restructuring” February 2.

The key word here is “reckon”… because the indebtedness of Venezuela has clearly not followed a transparent process. Frequently there are references to odious debts, but very rarely or never to the fact that these most often arise from odious credits that should never have been awarded. That “odiousness” extends from a shameful lack of due diligence to outright participation in corrupt acts.

All citizens in the world would greatly benefit from having a clear definition of what should be considered odious credits, and of its consequences. Without it, any Sovereign Debt Restructuring Mechanism (SDRM) similar to the one proposed 2002 at the IMF by Anne O. Kruger, would be found wanting.

PS. Because Robin Wigglesworth has touched on this theme I am copying him. 

https://ftalphaville.ft.com/2016/05/06/2161045/donald-trump-and-the-sovereign-debt-restructuring-mechanism-revisited/

https://www.ft.com/content/fa6850cc-96c3-11e7-b83c-9588e51488a0

Sovereign Debt Restructuring Mechanisms (SDRM) starting with salvaging and not with preventing, are moral hazards

Sir, Elaine Moore’s when reporting on Sovereign Debt Restructurings Mechanisms quotes Anne Krueger with: “Government should be able to declare bankruptcy, just as companies do. Instead of bailouts and lost decades of austerity, they should be able to wipe the slate clean and start again.” “Economist in a hurry” August 8.

“No!” if it means irresponsible governments will find it easier to start from clean slates

“No!” if it means irresponsible creditors will be bundled together with responsible ones.

“Yes!” if it means responsible governments will have a chance to restart their country.

“Yes!” if it means odious creditors will be required to assume the largest share of sacrifices.

And for the latter to happen, nothing better than assuring that any Sovereign Debt Restructurings Mechanism developed, diminishes the possibilities of being needed.

In this respect I believe any acceptable SDRM should begin with:

First and foremost by eliminating all incentives that can help governments contract too much debt… like banks being allowed to hold much less capital when lending to sovereigns than when lending to citizens.

And then by defining clearly what, when compared to ordinary credit to the public sector, should be deemed as odious credit. For instance, credit not awarded in a transparent way, or awarded when it was clear that the resulting debt might not be sustainable, and was therefore of speculative nature, should not receive the same treatment in a SDRM, as public credit awarded transparently and when there was no doubt about the sovereigns capacity to serve it.

Anne Krueger holds “If you get to a stage where a country’s debt is so large that it cannot grow, then you need to rethink”… and that to me, as an ordinary citizen, is best done by thinking and rethinking about how it landed itself in such a mess.

PS. The article ends quoting Krueger with “And there will be a next crisis, though where it comes from is likely going to take everyone by surprise”. If only she could convince our bank regulators of that. They still believe that the unexpected problems, for which banks need to hold capital, should be based on the expected problems derived from credit risk.

@PerKurowski