Goldman Sachs, Venezuelan Bonds & The Golden Straitjacket
Goldman Sachs is a global investment bank with big ambitions and a bit of greed. Venezuela is a little country with big oil reserves and major political, social and economic woes. The Golden Straitjacket is a term used by Thomas Friedman to describe the political constraints placed on countries as they subscribe to the free markets.
Such politics. Much economy. Wow.
Earlier this week Goldman Sachs buys Venezuelan bonds at a 69% discount, giving the regime $USD865.000.000 for $2.8 billion dollars worth of bonds due in 2022.
The opposition refers to them as ‘hunger bonds’ and the transaction receives wide condemnation for providing a lifeline to the struggling regime amidst sixty days of fierce protests and bloody repression. However, I believe it is important to focus on Friedman’s Golden Straitjacket theory in order to gain a better understanding of the situation.
The Golden Straitjacket
Friedman argues that ‘As your country puts on the Golden Straitjacket, two things tend to happen: your economy grows and your politics shrinks.’ It is a straitjacket because it ‘narrows the political and economic policy choices of those in power to relatively tight parameters. That is why it is increasingly difficult to find any real differences between ruling and opposition parties in those countries that have put on the Golden Straitjacket.’
The Golden Straitjacket is the free-market formula also referred to as the Washington Consensus. It goes — apply the set number of economic policies and measures and foreign investment will come. Giving up political power to maneuver the economy in any way you want is then rewarded by foreign investment and subsequent growth. If the Supreme Commander in Chief pushes the wrong buttons then investors will flee the country, taking their money, companies, and resulting jobs and economic prosperity with them.
How then can we possibly explain Goldman Sachs investing in Venezuelan Bonds?
Goldman Sachs Scenarios
As a starting point, foreign capital entering the country should be taken as a positive outcome. Completely shutting out Venezuela could have even worse effects. If the international community is not invested in the country, why would they care what happens there? Look at Cuba and North Korea. Authoritarian regimes are good at staying in power if left to their own devices.
However, most of the criticism arises from the fact that Goldman Sachs has handed over money when there isn’t a single economic policy to suggest the ‘Golden Straitjacket’ is in place in the country to protect both citizens and foreign capital from the erratic actions of the Maduro administration. In fact, not only has the government interfered with every aspect of the economy in direct contradiction to the standards required by the Golden Straitjacket, but is also engaged in gross violation of human rights on a daily basis for quite some time now.
Engaging with the Venezuelan government in these circumstances would send the message that, as far as the minimum viable conditions a country must meet to access the global capital markets are concerned, slaughtering your people is acceptable.
The third scenario sees Goldman Sachs entering into negotiations with the Venezuelan Government at a time when there is a gross imbalance of power. The former has the world’s capital, billions upon billions at their disposal — all within a few signatures and clicks away. The latter is desperate, bankrupt, and facing fierce resistance on the streets. As someone eloquently put it, “oppressing millions of people is expensive”.
Payback Time.
It is important to remember that the bonds are a two-way street. Goldman Sachs gave 865 million to the Venezuelan Regime, they expect to get 2.8 billion back plus interest in 2022. So, where is the current regime, with it’s failed economy, going to raise the money to pay back? What could possibly inspire confidence in Goldman Sachs that Venezuela will be able to meet its financial obligations? A change of government.
Is it possible that the mainstream media and the opposition have interpreted Goldman Sachs actions in the wrong way?
The Trump administration has two characteristic features — trigger happy and full of Goldman Sachs executives. Perhaps Washington and Wall Street are sending a subtle message of support to the people on the street protesting, something along the lines of ‘Go ahead guys, you have our full support’. Perhaps the message is more blunt ‘Either you guys deal with it now, or we will come and deal with it ourselves later’.
The Next Republic
Venezuela had already been largely shut out of global capital markets. Most recently, even trading partners such as China — that in the past were happy to provide large amounts of cash in exchange for very generous Oil concessions — have stopped the flow of money into the Venezuelan coffers. In such a void, Goldman Sachs reentering the picture at this time represents a noticeable shift of the country prospects.
One thing is certain, the Golden Straitjacket might not have been worn yet — not for a while, not particularly tight — but that doesn’t mean that it isn’t ready to be tightened with full force when necessary.
Reference — Thomas L. Friedman, The Lexus and the Olive Tree, New York, Farrar, Straus and Giroux, 1999
