Miles Gloriosus Redux

Ever since they have sat around a fire, or in comfortable candle-lit theaters, humans have enjoyed good comedies.  A recurring target of laughter has been he who indulged in hyperbole;  Plautus’ Miles Gloriosus, the Commedia dell’ Arte’s Matamoros and Theophile Gautier’s Capitaine Fracasse, one character for the ages.

For some reason, I was reminded of this transcendental “hero” when I read Argentina’s economy minister declare yesterday: “We are not going to sign any agreement that compromises the future of the Argentine people”[1].

Was the minister was referring to a demand made at gun point by a world power to grab the country’s oil and gas deposits or to blockade its grain exports lest it can set its own prices?  No, the minister was referring to his refusal to pay some $1.5billion of sovereign debt and interest thereon to investors[2] who refused to accept the “restructuring” terms imposed in 2004 by the Argentine government! 

Well, restructuring is perhaps misleading...  Before 2004, when countries were unable to repay their debts as originally agreed, they negotiated; that was in the interest of all parties.  The Brady bonds which were issued in 1990-1994 to restructure the debts of most Latin American sovereign debts[3] included an estimated forgiveness or “haircut” of 30% to 40%[4].  In 1998, Russia broke with tradition by insisting on a haircut of about 55%; there again, the eventual loss was much lower.

Argentina decided to go for a 75% haircut!  In my mind, that was tantamount to reneging on its obligations.  Why did they get away with it?  For two reasons: 1) Argentina’s was an isolated country default at the time rather than part of a wider regional or global meltdown, so that institutional creditors had more capacity to take losses, and 2) unlike in the 1980s and 1990s, Argentina’s debts were mostly in the form of bonds which were widely held - including famously by Italian pensioners - and traded; the creditors were thus in a weaker bargaining position.

Being traded at very low prices, some of these bonds were acquired by vulture funds which bet that, since under New York law, one party to a contract cannot amend it unilaterally, they stood a good chance to get paid.  It has taken them a decade, but they seem close to their goal.

Ironically, there has been much hand-wringing by states, money-center banks and even the IMF of all people, that the legal travails of Argentina are bad for the global financial system because they show that orderly restructurings are not feasible.  “Experts” have suggested including cram-down clauses[5] in the borrowing contracts; local “experts” have suggested that sovereign debtors borrow under their own laws so that they could amend them to suit their debt service ability (or willingness).

It is true that the investor base of emerging markets bonds is much broader than it was thirty years ago, making it more difficult to obtain unanimity in case contracts need to be amended.  But the application of New York law and the absence of cram-down clauses have also permitted emerging countries to borrow at very low rates.  If a debtor in difficulty proposes a rescheduling that matches its future capacity to pay, chances are that there should not be much room for arbitrage; and if some creditors opt out, they should represent a small enough percentage to be bought out.

A financial system allowing sovereign debtors to legally renege on their obligations by taking refuge behind their own laws or generous cram-down clauses cannot work: not for institutional traders (who couldn’t count on always finding willing buyers with whom to close their positions), not for investors (who would face too many unknowns to make long term commitments) nor for borrowers (who would have to pay much higher interest rates).

Finally, let us put Argentina’s cries (or bravado) in perspective: because of its defaults of 1983 and 2001, I don’t believe that Argentina has repaid any sovereign 10 year loan or bond issued between 1974 and now according to its original terms.

So the Argentine debt saga will go on for a while at least.  Over the last decade, its economy has continued to deteriorate, not just because the country couldn’t access international financial markets, but because its government practiced policies, from price fixing to expropriation and debt renegation, which discouraged investment from locals and foreigners alike and distorted the country’s economy and finances.

Nothing to brag about.

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[1]   As reported by the Financial Times on 7/31/14.

[2]   Mostly Elliott Management Corp. after they had bought them from previous creditors.

[3]   Non Latin American countries also issued Brady bonds.

[4]   Estimated because it depended on the level of future US Treasury yields and Libor rates as the Bradies were priced off them.  In reality, as US interest rates dropped continuously in the 1990s and 2000s, the eventual loss to creditors  (if they had held on to the paper) was much less.

[5]   Such clauses would permit the debtor to force new repayment terms on its creditors provided they had been accepted by a minimum proportion of them (15% to 25%).

The Standard Chartered saga revisited

Two years ago, Standard Chartered plc made headlines when it was fined $667 million by the US federal and New York state authorities for laundering, including through its New York unit, some $250 billion on behalf of Iran, Sudan, Libya and other countries in violation of American sanctions.

Going a long way to explain how the bank got into its regulatory travails was the memorable line attributed to its then Chief Financial Officer: “who these f*** Americans think they are to tell us what to do”.  Not only did the bank hide its illegal dealings, it obfuscated (before being forced to cooperate) and even threatened to countersue the NY Department of Financial Services for causing damage to its reputation!

Back in August of 2012, I wrote that Standard’s difficulties stemmed from either a culture harking back to the Indian colonial days or the need to preserve a business overly dependent on risky emerging markets (EMs).  Either way, although its stock price had then fallen in the mid 1300s[1], I felt that the conditions were not met to justify investing in the stock.

Today the stock is at 1,218p, yet I don’t feel tempted to buy. First semester 2014 net income is expected to be down 20% year-on-year[2], full year 2013 net income was down 15% from the year before, and 2012 net income was essentially flat with 2011; return on common equity has been trending down steadily since 2004[3]; loan impairments have been rising (+35% in 2013)[4].  Finally, the business risk profile of the bank remains, in my opinion, high, with close to ¾ of its loan book in emerging markets as well as almost all of its profits[5].

Culturally, and despite some senior management reshuffling since the 2012 fiasco, not much has changed according to a Financial Times article of 7/24/14 which noted “widespread criticism that the bank is run like a colonial empire” and that “arrogance at the bank has got so high”.

Criticism from large shareholders has mounted, so much so that the bank’s board felt obliged yesterday to issue a press release reiterating its support for the current CEO; and last May, 41% of voting shareholders rejected the new management pay policy.  It may well be that the bank owners will force a change in management; but that does not guarantee a change in culture.  Culture in an institution that spans vast regions and whose Country Heads are generally all powerful (because they possesses far more local knowledge than Head Office does), is hard to reshape.

More crucially, I believe that Standard Chartered is following a high risk strategy by being so dependent on emerging markets, particularly Asia.  I have some experience in this, having spent my banking career with a bank (American Express Bank Ltd) which had a similar emerging markets focus, although with greater regional diversification[6].

China and Hong Kong are the single largest business focus of Standard Chartered.  While I am sure that its country officers have good knowledge of their local customers and counterparts, I don’t think that they have a comparable knowledge of the macroeconomics or politics, because nobody really does. That is a big risk that the bank is assuming.

While emerging markets have had faster economic growth than the developed ones over the span of several decades, they also have had more crises and these have been more severe[7].  These crises have also tended to spread from one emerging market to another as individuals and institutions rush out to cut risk.

Because of their inherent leverage, banks are most exposed to financial and economic crises.  When such crises hit emerging markets, the big international money center banks can usually count on their large home businesses to absorb EMs losses; this was evidenced by the Latin American crisis of the 1980s, the Mexican crisis of 1994 and the Asian crisis of 1997-1998.  But a bank such as Standard Chartered has no large home market to fall back on, and should such an EM crisis come about, it will find that EM central banks have neither the resources nor the inclination to save foreign banking institutions operating on their soil.

So while Standard Chartered looks cheap, it remains, in my view, beset by two big problems: (1) “tainted” management team and culture, and (2) overexposure to emerging markets.  The first problem may soon see the beginning of a solution, but changing a culture takes time.  The business strategy is much more complicated (and costly) to fix, and some of the biggest macro risk factors affecting the bank are very difficult to assess.

JP Morgan has better management, a lower risk profile and better profitability, and it sells for 1.06x book value and 1.45x tangible book value.  Standard Chartered sells for 1.11x and 1.31x[8] respectively.  Is that logical?  I don’t think so.  In my opinion, STAN should probably sell at a 25% valuation discount to JPM.  This would put STAN stock price at 878p to 912p.

I remain on the sidelines, neither owning not shorting the stock.

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[1]  After recovering from a precipitous drop to 1,228p on 8/7/12.

[2]   As per management preannouncement.

[3]   Source: Bloomberg.

[4]   Source: JP Morgan.

[5]  It is estimated that close to 70% of the profits come from Asia and the subcontinent and another 25% from Africa and the Middle East.

[6]   Coincidentally, American Express Bank Ltd was sold to Standard Chartered in 2007.

[7]   Obviously, the US and Europe have just had a very severe crisis, but I would argue that it has forced them to take remedial measures.

[8]   Based on end of year 2013 tangible and overall book value.

Latin America’s long unfinished journey

In his autobiography, The accidental president, F.H. Cardoso[1] recalls an Ibero-American summit held in Havana in 1999.  At the luncheon attended by heads of state only, after copious libations, one guest suddenly stood up and addressed their host:

- “Damn it, Fidel, What are you going to do about this lousy, piece-of-shit island of yours?

Castro’s jaw dropped.

-“We’re sick of apologizing for you all the time, Fidel…It’s getting embarrassing…What are you going to do?”

Six or seven other heads of state out of the dozen present took turn making similarly heated challenges.  According to F.H Cardoso, this was all done “with relatively good humor” but the message was serious.  Castro responded with a pirouette and the conversation moved on.

Two things are fascinating about this anecdote: one is that President Cardoso, himself a Latin and a highly talented sociologist, went on to write that despite their leftist leanings, leaders such as N. Kirchner, E. Morales, and yes, even H. Chavez, would reject the Cuban model and find that they had no alternative but that of working with the capitalist free-market system.  Another is that F. H. Cardoso thought that “Chavez’ eccentricities were intended to appeal to his domestic audience and not an expression of ideology”.  He proved wrong on both counts.

Fast forward to April 28, 2014 and an article authored by Moises Naim[2] in the Financial Times.  In it, M. Naim detailed the enormous influence that Cuba has gained in the economy, external trade, internal security, social programs and the oil industry of Venezuela.  He ends up with another telling anecdote by recalling what the minister of defense of a Latin American country told him:

-“During a meeting with high-ranking Venezuelan officers we reached several agreements on cooperation and other matters. Then three advisers with a distinctive Cuban accent joined the meeting and proceeded to change all we had agreed.  The Venezuelan generals were clearly embarrassed but didn’t say a word…Clearly the Cubans run the show”.

What happened?  How did such a well informed and intelligent man as F. H. Cardoso got it wrong?  How did Cuba not only survive but attain its highest level of regional influence and power ever?  What does it say about the future of Latin America and the risk factors for investors?

In my view, one has to start with two fundamental factors.

The first is the boom in commodity demand which started in late 2003.  The following table shows how much commodity prices have risen since then:

	12/03 to 6/08	12/03 to 12/13
Copper	270%	220%
Iron Ore	340%	860%
Thermal Coal, Australia	370%	150%
Gold	110%	200%
Crude Oil, Brent	340%	270%
Beef	20%	75%
Wheat	110%	66%

In many Latin American countries, the resulting profit windfalls largely accrued to government owned or controlled companies.  This helped populist sitting presidents to consolidate their hold on power by distributing monies via subsidies and/or by greatly increasing the public sector headcounts.  The temptation to access all that money even led some governments to (re)nationalize or expropriate foreign company owners.  In sum, the commodity boom, paradoxically, helped consolidate the power of sitting, left-leaning, presidents and diminished the need to foster competitive and growing private sectors.

The second factor is one that some people are driven by a strong, unbending, ideology.  Generally, such radical views are adhered to, more or less openly, throughout adult life.  This is why it is important to research the writings of upcoming politicians, particularly those produced in their youth: such writings are often less guarded than later ones and thus more enlightening.

To ideological leaders, transforming society, even at a great cost, is more important than incrementally improving the economy; and since they already know the Truth, there is no point diluting it or delaying its coming through the vagaries of the democratic process.  It is no wonder that a liberal and pragmatic statesman like Cardoso would find such thinking alien and therefore unlikely to succeed[3].   Hugo Chavez was the best example of an ideological, transformational leader, who also was in the best position to capitalize on the commodity boom.

But commodity booms and populist leaders do not fully explain the resurgence of Cuba in Latin America.  There again, we should look at this issue on two levels:  Venezuela and the region.

Cuba had long eyed the oil riches of Venezuela, reportedly since the early 1960s[4].  That interest, together with a shared ideology and the personalities of Fidel Castro and Hugo Chavez, essentially explains the extraordinarily close association – some might call it symbiosis – between Cuba and Venezuela.  The tangible benefits for Cuba have considerable: total 2008 annual Venezuelan aid to Cuba has been estimated at about $10 billion[5].

Cuba’s regional resurgence has been helped by the financial largesse of Hugo Chavez as well as his staunch personal support; the Venezuelan president was after all from a younger generation, like Nestor Kirchner, Rafael Correa and Evo Morales; but unlike them, he was charismatic and had a big checkbook.  For those in Latin America in search of an anti-US, anti-liberalism standard bearer, Hugo Chavez was thus a fresher face and carried less baggage than Fidel Castro. 

Looking ahead, the future of Latin America is less bright than imagined during the commodity boom of the last decade, but it is not uniform across the region.

As we already noted, money from higher commodity prices helped populist leaders consolidate their hold on power.  This lever is no longer available.  But others remain: demography, where most countries have very young populations; better organization, where progressive or leftwing parties have proven more effective at rallying votes than their more conservative opponents; finally, culture, which changes only very slowly.  Add to these factors a certain anti-American sentiment, which is never far under the surface in Latin America.

As the Venezuelan Pactolus has shrunk, smaller countries such as Bolivia and Ecuador have toned down their anti-investor policies.  But large countries will not change so smoothly or quickly:  faced with critical economic and financial challenges, Argentina has made some key cabinet changes and tried to steer a more pragmatic course.  The Argentine political scene is lively and resilient, and the opposition(s) does count on recognizable leaders; while Peronism is ingrained in the culture, local conditions allow for political alternance. 

Brazil is much bigger, population-wise, and while culturally more diverse, it is less fractious.  Over time, the PT - the governing political party – has evolved, drifting from its trade union roots to incorporate more left-wing political activists less interested in working within the liberal system than in getting rid of it.  That drift, combined with poor macro-economic performance and the vicissitudes inherent to a long stay in power, have sapped its national support.  The opposition parties have brought to light a series of large and embarrassing scandals.  But while some change for the better is to be expected in economic policy, the absence of a single and popular opposition presidential candidate, and therefore of a coherent message, dampens hopes for major progress.

Colombia is facing its own challenge, namely, what to do with the FARC.  Unlike its predecessor, President Santos decided to accept a peace negotiation in Havana and has relaxed the pressure on these armed groups.  The results so far are poor: as measured by attacks on pipelines, domestic security has clearly worsened, and these attacks are taking a heavy economic and financial toll on the oil and gas sector, the most important contributor to national exports.  There is little popular support to let the FARC rejoin political life as a party, or to pardon its leaders.  Finally, it is difficult to imagine that Cuba and Venezuela, the facilitators of the peace negotiation, will want any outcome other than a favorable one to the FARC, putting them at odds with the vast majority of the population.  The economy of Colombia remains robust, but, in my view, has become more fragile.  Peace may still be found with the FARC, but I think that it will be after stepped up military efforts to improve security and weaken the rebel groups.

Chile is following its traditional contra-cyclical path, trending downward as Brazil and Argentina appear on the verge of trending up.  I have reviewed in earlier notes what is troublesome with Chilean politics today, namely a turn towards more populism, less dialogue across the aisles and economic policies which are not pro-growth. 

As for Peru, it has been the Rodney Dangerfield of Latin America, posting impressive and consistent economic growth.  A fiery candidate, Ollanta Humala has proven to be a pragmatic president and the initial skeptics (including me) wrong.  Besides its very large mining industry, Peru has developed a competitive agricultural sector and boosted oil and gas exploration and production.  Its long-term economic success is finally being recognized and should continue so long as successive governments keep finding the right balance between growth and income redistribution.

What about Cuba?  Hugo Chavez is no longer here to bolster its elderly historical leaders and Venezuela is no longer financially able to prop up its economy to the extent it did a few years ago.  Preferential oil shipments from Venezuela have reportedly been reduced by one third since 2008.  Latin American leaders have not publicly criticized the Cuban security and military interference in Venezuela, but it is unlikely that they support it, especially when there is no strong Venezuelan presidential figure to make it appear less threatening. 

Besides the potential political backlash, should Brazil and Argentina elect centrist presidents, Cuba faces a greater headache which is how it manages its symbiotic relation with Venezuela.  30,000 to 50,000 Cuban security, military, medical, IT, trade and other staff are reportedly in Venezuela.  These people live in a freer, richer country where corruption is rampant.  How will they react?  If history is any guide, from Alexander the Great to Ancient Rome to Victorian England, military victors, once they turn occupiers, tend to absorb the culture of the conquered.  Can Cuba repatriate these tens of thousands of men and women without risk?  And until it does, or doesn’t, how can it manage its close involvement with Venezuela?

Another growing headache is the continuing popular protests and their violent repression in Venezuela.  As shown on social media, this repression appears to be carried out by local police and militia units.  But if the protests escalate, there inevitably will be a risk of a loss of control by the Venezuelan government and the temptation to step up the violence.  What will Cuba do?

Finally, neither the Chavista movement nor the opposition is united, so that the political and power dynamics are fluid, to say the least.  Until it can secure an alternative path, Cuba must preserve whatever manna Venezuela sends its way, which means that, as the Venezuelan economy worsens, Cuba must get more involved into local affairs, with the attending risks already mentioned.  In the end, I believe that Cuba will join-  or fall into - the NAFTA orbit, because it is its most natural trajectory, geographically, historically, economically and strategically.  When it does, a page will be turned in Latin America.

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[1]   President of Brazil from 1995 to 2002.

[2]   Former Venezuelan minister of industry and trade.

[3]  To his credit, F. H. Cardoso stopped all contacts with Fidel Castro when the latter cracked down on dissidents in 2003.

[4]   According to British historian Hugh Thomas, Fidel Castro met with Venezuelan president R. Betancourt and asked for a $300 million loan and oil assistance package, both of which were refused.

[5]  Special Report on South South Cooperation 2010 by Carlos Antonio Romero.

Zorro est arrivé

As related in prior posts, because of gross economic mismanagement, Venezuela is experiencing an acute shortage of foreign exchange.  The result is that local companies cannot pay for imports, which in turn causes them to cut back production and makes a bad situation even worse.  Recently, the franchisee for Toyota in Venezuela announced that it was closing for 45 days due to a lack of parts and components.  But a lack of dollars is not the only problem.

 

I thought it would be instructive to compare the initial response of President Nicolas Maduro to this crisis with that of Winston Churchill upon becoming Prime Minister.  You draw your own conclusions.

Nicolas Maduro[1]                   

“I just ordered the Minister of Industry to summon the Head of Toyota for Latin America or somebody from Tokyo…Sometimes [companies] get desperate for no good reason…If one of those pencil-pushing managers[2] thinks he can alarm [the country], better watch out… It would seem that the only plan of these pencil-pushers is dollars, dollars and more dollars…Where is the capacity to create products in Venezuela if here we have everything: aluminum, petrochemicals, iron, steel.”
 

Winston Churchill[3]

“I would say to the House, as I said to those who have joined this Government: I have nothing to offer but blood, toil, tears and sweat…You ask, what is our policy?  I can say: it is to wage war, by sea, land and air, with all our might and with all the strength that God can give us…This is our policy.  You ask what is our aim?  I can answer in one word: victory, victory at all costs, victory in spite of all terror, victory, however long and hard the road may be, for without victory there is no survival.

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[1]  As reported by the newspaper El Universal on 2/8/14.

[2]  In the Spanish original text: Un ‘gerentico’ de estos bureaucraticos.

[3]  Speech of May 13, 1940 at the House of Commons after Churchill had formed his government.

Latin America in 2014: part IV, in conclusion

The new year 2014 has seen a major retreat from emerging markets as investors sold both what they should and what they could.  Having started with political turmoil in Thailand and Turkey, the current train of worries has caught up with economic basket cases like Argentina and Venezuela and policy sinners like Brazil.

A rising tide lifts all boats, and during the last decade and a half, there were not one but two powerful tides: ample global financial liquidity and booming demand for commodities.  Under such conditions, even lead-bottomed boats happily bounced in the waves.  But commodity demand slowed abruptly with the advent of the Great Recession, and liquidity is no longer gushing except perhaps in Japan. 

In retrospect, where did investors who bet on the lead-bottom boats go wrong? In particular, where did political risk analysis err?

One big mistake was failing to recognize the true goals of some incoming government leaders.  Hugo Chavez, like Lenin and Mao Tse-tung before him, was driven by a strong ideology and was bent on thoroughly and irreversibly transforming society.  To these men, issues such as falling GDP, foreign trade and international investment flows were of little concern.  That is why the first would decapitate PDVSA and expropriate local and foreign companies, the second repudiate Russia's foreign debts and the third would carry out the Cultural Revolution.

These leaders were willing to incur international isolation, and even welcomed it, as a necessary condition to reach their primary objective.  In the case of Venezuela, it is interesting to note that a handful of very prominent local businessmen recognized this and took appropriate defensive measures early on, while most major industrial and portfolio foreign investors didn’t. 

To better understand incoming leaders' goals, it is very useful to read their writings, particularly those written in their youth[1][1].  Often, these writings are dismissed as erreurs de jeunesse[1][2], but when one considers the examples of Hugo Chavez and others, these men have been remarkably true to their youthful aspirations.  Budding emerging market investors, when a new charismatic and/or transformational leader is elected, DO look up his writings, whether these are one year or two decades old!

Culture and history also play a strong role in appraising political risk.  For example, communist China and the Soviet Union were able to create new structures that provided stability if not efficiency.  These structures were often based on similar ones that existed under prior regimes.  Venezuela, by contrast, has been unable to do the same.

Another useful warning sign of future trouble is financial and economic policies that work at cross purposes or governments that believe they can micro-manage their way to prosperity.  When policies start looking like a Cubist portrait, beware!  Examples include manipulating foreign exchange rates, inventing subsidies of all kinds, introducing price controls, and of course decreeing expropriations.  The problem with these is that they scare away private capital, without providing any substitute as government bureaucracies have neither the financial nor the human resources to step into the void which they created.

Where do we go next?  The truth is that, most developed and emerging countries will wait until the very end before making reforms.  Their governments will also weigh their chances for survival, remembering Alexis de Tocqueville’s observation that “the most dangerous time for a bad government is when it starts to reform”.  Eventual success will be depend on abilities, ideologies, culture and closeness to the abyss.

Brazil
Its vastness, its large population and its culture of moderation make it resistant to extremism.  While the Lula government represented a turn to the left and adopted populist rhetoric, particularly in foreign policy, it didn't yield to revolutionary temptations thanks to its trade union roots: unions fight to improve the standards of living of their members, they don't trash the productive apparatus.  That historical link weakened somewhat under his successor, Dilma Rousseff.

With the drop in commodity prices and investors’ new risk aversion, the government must take corrective measures to control public spending, reduce public debt and stimulate growth.  Recent popular demonstrations again lavish World Cup expenditures will further drive that message home.  Finally, the government activism in the economy, particularly in Petrobras and the electric sector, has proven disastrous:  Petrobras, once again, has become a bloated outfit with massive debts, a stagnant production and a crashing stock price[1][3].  The electric utility sector, which is very reliant on hydroelectric power plants[1][4], is operating near full capacity and subject to more frequent and massive blackouts.

There already is a change of attitude (with President Rousseff first trip to the Davos WEF); some policy changes are forthcoming ahead of next October general elections, bigger ones will come afterwards whether Ms. Rousseff and the PT win or lose.  It is clear that the popular support which President Lula and the PT enjoyed has since waned, that reforms are both needed and demanded.  I believe that they will materialize.

Venezuela
This is by far the biggest problem in the region.  The charismatic Chavez has been replaced by a man of little charisma, authority and apparent talent.  Much has been written about the government’s disastrous economic and monetary policies, the growing criminality and the accelerating breakdown of public institutions and large economic units.  Cuba, which plays a major role with its extensive intelligence and security presence, is keeping a low profile for now.

The deterioration of the economy has accelerated so far in 2014, the acute shortage of dollars is evident and the government has responded with what are essentially threats rather than clear policies.  China, already a major creditor[1][5], seems to have said “no mas”.  In the very short term, one can expect the government to further squeeze the local private sector and to enter into selective default, paying its foreign sovereign debt and little else.

Current policies will lead to an economic collapse.  Can this be avoided?  The opposition seems discouraged and in any case is ineffective; after all, it has understood that it can’t defeat Chavismo through elections.  The most interesting commentary on Venezuelan politics has recently come from 94 year old Luis Miquelina.  A former communist, supporter of Fidel Castro, he was an early supporter of Chavez serving as his justice and interior minister; he also served as a senator and president of the Constituent Assembly of 1999.

In a recent interview, Miquelina said the following:

-         -Venezuela is now an appendix of Cuba, which is unacceptable,

-         -The current communist government has destroyed the productive apparatus and private property rights, and it has displayed corruption without limit,

-         -There is no exit via elections as these have proven to be fraudulent; the fight must be brought to the streets,

-         -The army is as much a victim as the civilians and both must join forces,

-         -There can’t be negotiations with the government unless it is on the basis of rough equality of power.

Interestingly, the response to this blunt piece has been dead silence from all sides.

Although the situation could turn volatile quickly, a popular revolt looks unlikely right now.  Nevertheless, the current regime could try to preempt this eventuality by vesting governing powers into more capable hands.  But who has the credibility and power to reorganize inefficient public institutions and companies, to renegotiate the onerous oil deal with Cuba, and to convince the population to accept painful reforms?  I think that Chavismo will give it a try, perhaps attempting to co-opt some in the opposition, but in the end there will have to be a collapse before there can be a revival. 

So when you look at the region, as I did through our last four posts, you will probably share my conviction that Latin America will make headlines throughout 2014.  You may also share my guarded optimism that the balance will tilt, by a small margin, towards the positive.

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[1]  These are not always easily available.

[2]  Litterally, errors of the youth.

[3]  Some 78% fall since the recapitalization of the company and the new deep-offshore regulations were announced in 2009.

[4]  Brazil is also suffering from a dry spell which is affecting the water reservoirs.

[5]  For about US$20 billion repayable in oil.