The Riskiness of Country Risk

How horrible it must be to work as an air-traffic controller! Any slight error can provoke an unimaginable human tragedy. No wonder these professionals burn out so rapidly. I “suppose” the same must happen with the country-risk assessors, those people who carefully pass judgment as to what the country risk is for any given nation.

The all important mission of these risk evaluators is twofold. The first, that for which they are actually paid, consists of analyzing whether or not the debtor nation will ultimately be able to honor its obligations. This determines whether or not pension funds, banks, and insurance companies will be willing, or even allowed, to invest in that country’s sovereign debt instruments. The second, even more important than the first, is to send subtle signals to the governments of these nations in order to help them improve their performance.

What a difficult job this is! If they overdo it and underestimate the risk of a given country, the latter will most assuredly be inundated with fresh loans and will be leveraged to the hilt. The result will be a serious wave of adjustments sometime down the line. If on the contrary, they exaggerate the country’s risk level, it can only result in a reduction in the market value of the national debt, increasing interest expense and making access to international financial markets difficult. The initial mistake will unfortunately turn out to be true, a self-fulfilling prophecy. Any which way, either extreme will cause hunger and human misery.

What a nightmare it must be to be risk evaluator! Imagine trying to get some shuteye while lying awake in bed thinking that any moment one of those judges, those with the global reach that have a say in anything and everything, determinates that a country has become essentially bankrupt due to your mistake, and then drags you kicking and screaming before an International Court, accused of violating human rights. If I were to be in the position of evaluating country risk, I would insure that the process is totally transparent, even though this takes away some of the shine of the profession and obligates me to sacrifice some of my personal market value.

How lucky we are that we are neither air-traffic controllers nor sovereign-risk evaluators! However, since we can easily become victims of their missteps, it behooves us, if only because of our survival instinct, to make sure that both do their jobs correctly.

We have seen in recent Country Reports how, after having introduced a myriad of information into the black box of methodology, as if by magic, a credit qualification is produced. Many of these reports seem to me like the pronouncements of film critics. It would seem that, more often than not, the individual evaluator is determining more how much he likes the ways or forms the Directors of a nation try to honor its obligations than on producing an honest and profound financial analysis of the country’s capacity for servicing its debt correctly.

In his book The Future of Ideas: The Fate of the Commons in a Connected World (New York: Random House, 2001), Lawrence Lessig maintains that an era is identified not so much by what is debated, but by what is actually accepted as true and so is not debated at all. In this sense, given the risk that the perceived country risk actually becomes the real country risk, it is best not to assign an AAA rating blithely to the risk qualifiers—perhaps not even a two-thumbs-up.

From The Daily Journal, Caracas, September 27, 2002

Spanish version, El Universal, Caracas September 26,2002

Guacara is not Basel

The credit portfolio of the Venezuelan banks, which in 1982 amounted to 16,000 million dollars, by June 2002, in constant 1982 dollars, barely reached 3,300 million dollars, that is, 21% of that of 1982. Being the case that levels as low as these have not been seen since the end of 1996.

In an article that I published in June 1997, I warned about the danger that, faced with the panic of falling into another banking crisis, we would exaggerate banking regulations, forgetting the main function of banking, which should be none other than be an active agent in the economic development of the country and for which the license is granted.

Since then, I have argued in multiple articles that we have to take care of the Basel banking regulations, which as part of the globalization process, seek to be imposed throughout the world, since these, although they may be logical for a developed country, , which perhaps only seeks to take care of its money, may be too strict for a developing country like ours.

You will then understand the reason for my anguish, when in a full-page interview published in a national newspaper, the new superintendent of banks did not mention a word about how banking can promote economic growth and limited himself to testifying about restrictive aspects of the regulation, with phrases such as: “we are the strategic ally of the system to guarantee deposits…” and “I have set the objective of adapting the system's regulations to the fundamental principles of Basel.”

Given the deep economic crisis in which we find ourselves immersed, if I were superintendent, on the contrary, I would do nothing other than try to determine if the current regulations could, in some way, be unnecessarily slowing down the granting of credits and, if so, Thus, I would proceed to modify them... whatever Basel says.

In any case, it should be noted that the impact that one or another type of banking regulation may have on the health of the financial system will always be infinitely less than that on the real health of the economy in which banking operates.

If there is something worrying about globalization, it is that that category of dangerous public officials, who limited themselves to developing regulations from their air-conditioned offices in Caracas, ignoring the real world, continue doing the same today, but from even more remote offices... in Basel.

Translated from article published in TalCual, Caracas, August 14 2002

 

Our economical policies suffer from inferiority complex

Financial Regulations: …our country has adopted, without blinking an eye, the regulations coming out of the Basel Committee, are more appropriate for the banking sector of a developed country than for ours. There is nothing wrong being a developing country, the bad is only to believe that by just adopting different postures, one could reach a different degree of maturity… just like the little girl who borrows mother´s lipstick in order to feel big.