Category Archives: Financial Crisis

By Arturo C. Porzecanski* The austerity measures that President Mauricio Macri announced yesterday to deal with the sharp depreciation of the Argentine peso and acceleration of inflation in the past couple of months are a belated but entirely appropriate effort to stem the country’s massive capital flight. His administration intends to lower government spending and […]

via Argentina: From Gradualism to Shock Therapy — AULA Blog

A government-imposed austerity measure affects everyone differently. The measure is usually designed to restore an economic balance between affordability and politically popular programs. At some point, a country must govern by implementing financially viable programs and not engage in risky deficient spending. Most citizens support governments that offer them services and benefits whose costs are not passed on to them. Elected offices prefer to cut costs rather than raise revenue by increasing taxes.

Former Argentine Presidents Nestor and Cristina Kirchner governed for 12 years based upon a populist mandate. As with all socialist endeavors, there comes a time when “the bills must be paid and accounts balanced.” President Marci has tried to eliminate gradually costly subsidized programs. Dr. Porzencanski makes the case in this post that time has run out for Argentina to slowly put its finances in order. I believe that Dr. Porzencanski’s analysis is intellectually sound. What was not discussed in the post was Argentina’s ability to pay back the money it had just borrowed. Do investors believe that Argentina can pay the political price for financial stability? The peso will continue to lose value as long as investors believe that Argentines will not accept Greece-like austerity programs. It is unreasonable to expect investors to automatically have confidence in Argentina’s ability to repay the money it has already borrowed.

Exchange Controls or Thievery at the State Level?

Last Tuesday, Brazil’s Gol Airline announced that it was immediately suspending operations in Venezuela. Aviation industry followers were not surprised by the announcement. A company spokesperson elaborated on the decision by stating that the temporary suspension would remain in effect until the issue of repatriation of company resources was resolved. Because of Venezuela’s restrictive exchange controls and incomprehensible regulations, payment of debts in foreign currencies depend upon the government making the funds available. Basically, since it was not getting paid the money it had already earned, Gol’s decision made perfect sense. Other international carriers doing business in Venezuela face similar problems with the repatriation of their funds.

The International Air Transportation Association (IATA) calculates that Venezuela is holding about $4b in funds that are rightfully the property of various international carriers. Venezuelan officials have said in negotiations with IATA that they would release some of the funds to the respective airlines. Yet, negotiators for Venezuela offered to discount the amount it would pay and then only release the funds over time. The airlines’ demand for full payment has been met by President Maduro’s threats of serious consequences if service is curtailed. IATA’s director general Tony Tyler believes that the Venezuelan government is being “willfully irresponsible.”  He warned that the country’s actions could result in it being disconnected from the rest of the world. It is not difficult to understand why flights to the country have dramatically decreased over the last few years. I think it is safe to conclude that Venezuela is using the funds owed to foreign corporations to pay its debts and daily expenses.

Foreign airlines find themselves in a “catch-22” while conducting operations in Venezuela. Over the years, the airlines have invested millions of dollars setting up and maintaining operations in the country. Some of the most lucrative routes are from and to Venezuela. Consequently, to avoid losing their withheld money and their investments in the country, the airlines continue to patiently negotiate a solution to the repatriation impasse. Airline executives’ worst fears could be realized by President Maduro expropriating all of the withheld funds in the name of the socialist revolution. However, the time seems to have arrived when foreign airlines must decide if continuing to do business in Venezuela is worth the risk of never getting paid. The airlines’ investment in the country might already be lost.

Before Gol’s announcement, other carriers had either drastically reduced their flights to the country or outright suspended service.  US carriers, Delta, United, and American Airlines had drastically reduced their flights to the country. In 2014, Air Canada and Alitalia suspended their operations in Venezuela over the repatriation issue. An Alitalia spokesperson explained the company’s decision by saying that Venezuela’s critical currency situation had made operations in the country unsustainable. Venezuela’s currency market is one of the world’s weakest. The bottom line is that the foreign airlines want to get paid the money that they have already earned.

Most of the funds held by President Maduro’s administration belong to America Airlines (AA). A few days ago, AA announced that it was not reasonable to expect payment of its money from Venezuela. Consequently, the company took a write-off of $592m against fourth quarter earnings. Other airlines had previously taken write-offs for the same reason. Delta Airlines took a $575m write-off against earnings. United took a substantially larger write-off for the same reason.

Doing sustainable business in Venezuela has proven nearly impossible for many American companies. For years, Procter and Gamble, Colgate-Palmolive, Pepsi Co., and AT&T had profitable business operations in Venezuela. In the early years of exchange controls, the companies struggled to maintain profitable operations and prevent a substantial loss of value of their investments in the country. All of these companies have taken substantial write-offs due to their inability to get paid their money that the Venezuelan government is holding. At an alarming rate, international companies are abandoning their operations in the country.

Most recently, tire manufacturing giant Goodyear took a charge of $646M against fourth quarter earnings. The company’s chief financial officer Laura Thompson said that the company had been unable since late last year to exchange Venezuela’s bolivars for dollars to purchase raw materials and otherwise continue operations. Ms. Thompson further stated that:

“The conditions, combined with Venezuela’s regulations, have limited our ability to make and execute operational decisions at our Venezuelan subsidiary”

These same reasons have forced other large American companies doing business in the automotive industry to take write-offs on their Venezuelan operations. General Motors took a $600m charge as a result of the bolivar’s devaluation and another write-down of $100 on the value of its manufacturing assets in the country. General Motors’ perennial competitor, Ford, took a fourth quarter charge due to changes in accounting for its Venezuelan operations.

Companies that have for years operated in Venezuela are discovering that they cannot get paid their own money and that the value of the in-country assets has dramatically decreased. Consequently, the companies have to curtail or end operations and make the necessary accounting adjustments. Venezuela’s tremendous decline of business activity has led to a noticeably lower standard of living for its citizens. It is important to remember that since the end of the Second World War doing business in Venezuela was very profitable, at least until Hugo Chavez came to power.