Venezuelan Bonds Are a Fabulous Investment, If You Don't Mind the Starvation

Jeff Jacoby
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Posted: Jun 26, 2017 12:01 AM
Venezuelan Bonds Are a Fabulous Investment, If You Don't Mind the Starvation

YOU WOULDN'T deliberately snatch food and medicine away from malnourished people. Nor, I'm sure, would you hire somebody else with explicit instructions to deprive suffering families of their basic needs.

But what about pumping money into a ruthless government that does those things? Would you buy bonds from a nasty regime if you knew that it would get the money to repay you by cutting back on the necessities of its already desperate people, and thereby cause even more starvation and misery?

Don't be too quick to say no. Lots of investors display no objection to propping up repressive governments by buying their debt. If you've put money into an emerging-market fund, chances are you're one of them.

The prime example these days is Venezuela, a once prosperous nation that has been reduced to Third World destitution by fanatical socialist misrule. Under President Nicolás Maduro, Venezuelans are starving: Three-fourths of the nation's population has lost dangerous amounts of weight, and 93 percent of Venezuelans don't earn enough to buy the food they need.

To raise money, the near-bankrupt Maduro regime has been selling government bonds at a discount — and some of Wall Street's biggest investment firms have been snatching them up. The Wall Street Journal reported last month that the asset management division of Goldman Sachs jumped at the chance to buy $2.8 billion of Venezuelan oil bonds at just 31 cents on the dollar. The bonds were issued by Venezuela's state petroleum company, but the regime's critics, with good reason, are calling them "hunger bonds." Maduro has adamantly seen to it that Venezuela meets its debt obligations, but he has done so by sharply curtailing imports of food, medicine, and other necessities. The upshot? Foreign investors get paid regularly. Maduro's access to cash and his grip on power remain intact.

And more Venezuelans sicken and starve.

Anybody have a problem with this?

As a business matter, Wall Street has good reason to buy all the "hunger bonds" it can lay its hands on. After all, they have proved quite a lucrative addition to investment portfolios.

Ricardo Hausmann, a professor of economics at Harvard (and a former Venezuelan government minister), points to the JP Morgan Emerging Market Bond Index Plus, or EMBI+, a widely-followed benchmark. Its returns "are heavily influenced by what happens in Venezuela," Hausmann writes, because "while Venezuela represents only 5 percent of the index, it accounts for about 20 percent of its yield." The very high return on investment reflects the risk that a future government might repudiate the debt, but it has also made Venezuela's bonds one of Wall Street's biggest moneymakers.

It stands to reason, then, that anyone hoping to make money in the bond market might invest in the EMBI+. But that means you'll be rooting for Venezuelan debt, Hausmann says. And that, in turn, means you'll effectively be "wishing for really bad things to happen to Venezuela's people." Should investors care that Maduro's government is forcing Venezuelans to scrounge for food in garbage cans so it can divert money to service bonds? "Sure, it's a humanitarian catastrophe," Hausmann comments acidly. "But to you it's a fabulous investment opportunity."

To many, maybe most, investors, the opportunity for gain is all that matters. How many American families, saving up for retirement or a child's future college education, scrutinize the holdings of the funds they invest in? How many fund managers, aware of their fiduciary duty to act in the best interest of their investors, want to risk a lawsuit for breaching that duty by avoiding a highly profitable investment — like Venezuela's "hunger bonds" — because of its moral taint?

There are boutique "ethical" investment opportunities for those who want them — funds that make a point of not investing in gun, alcohol, or tobacco shares, for example; or "cruelty-free" funds that hold equity and debt only in companies that avoid harm to animals; or investment vehicles designed to fight climate change. But the moral superiority of such funds isn't at all obvious. One person's ethical misgiving is frequently another person's obnoxious superstition.

Even where there is widespread agreement about the nastiness of a regime or the immorality of a practice, it isn't always clear that financial shunning will make things better. Disinvestment from South Africa was a popular strategy during the struggle to overthrow apartheid. But there were anti-apartheid activists who made a cogent case to the contrary. Dumping stock in companies with ties to the apartheid regime, they said, simply guaranteed that it would be bought up by investors who didn't have such qualms. So those who really wanted to influence a firm's policies should buy its shares, then use their leverage as investors to press for change.

Should investors plow their money into Venezuelan bonds? There is no incontrovertible answer to that question. Cutting off Maduro's access to cash might lead to even worse repression and hunger. Propping up his regime by buying Venezuelan debt could have the same effect.

Markets don't know everything. Neither do governments, or human-rights NGOs, or individuals. Sometimes the best advice is also the most difficult: Let your conscience be your guide.