Economics

The Hunger Bonds

May 26, 2017 Ricardo Hausmann

Investing often creates a dilemma over goals: Should we aim to do well or to do good? Nowadays, it is emerging markets as an asset class that should make people morally queasy, owing to Venezuela's outsize role in driving the performance of index funds.

CAMBRIDGE – Investing often creates moral dilemmas over goals: Should we aim to do well or to do good? Is it appropriate to invest in tobacco companies? Or in companies that sell guns to drug gangs?

The recent popularity of so-called impact investment funds, which promise to deliver decent returns while advancing social or environmental goals, is based on this unease. Foundations often find that these investment vehicles help them to do good both with the money that they spend on philanthropy and with the endowment assets that yield the returns on which their philanthropy depends.

Nowadays, it is emerging markets as an asset class that should make people morally queasy. Should decent people put their money in emerging-market bond funds?

To continue reading, register now.

Subscribe now for unlimited access to everything PS has to offer.

As a registered user, you can enjoy more PS content every month – for free.

Already have an account? Log in

PS Events: What Economics is Missing

Our latest event, What Economics is Missing, is now live.

Click the link below for opening remarks from Dani Rodrik, followed by a discussion among Ashwini Deshpande, Raquel Fernández, Minouche Shafik, and Vera Songwe on how to achieve inclusivity in economics.

Watch Now

new comment has been posted. new comments have been posted.

0 Comments on this paragraph, 27 Comments on this article

Per Kurowski May 30, 2017

Would lending money to publicly notorious corrupt government officials, all in order to obtain a possible 48% internal rate of return on an investment, classify as legal under the Foreign Corrupt Practices Act?

http://unsustainabledebtsustainability.blogspot.com/2015/10/we-must-not-allow-vulture-funds-to.html
A new reply to this comment has been posted.
Barry McHugh May 29, 2017

100 reasons to not provide the capital in the capital labour complex to help people help themselves. I was considering Shares on the Africa Continent till I read UNCTADs 2016 report on 75% underinvoicing of resource exports. And now NYT just wrot an article on helping people through liberalism. But to do nothing leaves the likes of African countries and Argentina paying interest rates that leave them indebted forever. At around 25% p.a., which is what the major global banks operating branches in their countries charge. So I'm stuck!
- Steve Hurst May 29, 2017
  
  Barry
  
  Could it be that they are charged that rate for a reason?
  Note that at the same time collectively the foreign aid runs at 3 to 4% of GDP
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Per Kurowski May 29, 2017

Besides credit ratings we need ethic ratings. Should someone financing gas chambers collect? http://unsustainabledebtsustainability.blogspot.com/2014/09/a-sovereign-debt-resolution-mechanism.html
A new reply to this comment has been posted.
John Reid May 28, 2017

There is also a another solution, particularly if you're well off. Tell JP Morgan you won't be using their services until they fix the problem.

You will, of course, have to remove all of your money from JP Morgan if this is to stick; threats only mea something when you put your money where your mouth is. That done, you wait for Venezuela to default...
A new reply to this comment has been posted.
Jeff Rutledge May 28, 2017

By the same token, if one have a political view of how the US government is currently being run, then that should affect decisions whether or not to buy US bonds?
A new reply to this comment has been posted.
Bernard Fudim May 27, 2017

You might also want to hold Venezuelan bonds because those bonds would otherwise have close to no value, and would trigger even higher interest rates, or immediate bankruptcy for the nation. Bankruptcy would not make life any easier for Venezuelans. Venezuelans face an unhappy future irrespective of the price paid by bond holders.
A new reply to this comment has been posted.
Peter Schaeffer May 27, 2017

Hausmann is correct (this time). Venezuela badly needs to pull an "Argentina" and default. The bonds are doomed. They are never going to be repaid. Why is Venezuela so intent on paying (for now) its debts? Not clear. However, much of Venezuela's debt appears to be owed to China. China is (apparently) a tougher creditor than most.
- Steve Hurst May 28, 2017
  
  Peter
  
  Can't disagree with any of that, but buying another 12 months by paying the debt for now seems to be the idea.
  A new reply to this comment has been posted.
- Peter Schaeffer May 28, 2017
  
  SH, Oil companies and oil countries don't need credibility to sell oil. All they need is the ability to load tankers. Oil companies absolutely need credibility (and lots of it) to sell bonds to finance development. However, Venezuela and PDVSA are light years away from that level of credibility. Making a few bond payments isn't going to change that.
  
  Bond investors look at Venezuela's track record, international debt, and foreign exchange reserves for guidance. Every indicator is flashing bright red.
  
  Selling bonds (internationally) is less important than you might think. The payback period for most petroleum projects is so short, that financing from cash flow is quite feasible.
  
  The real problem (actually only one of the real problems) is that Venezuela used the cash from $100+ oil to undermine (yes, undermine) the rest of the economy. Now that oil prices have crashed, oil cash and non-oil cash are both in very short supply.
  A new reply to this comment has been posted.
- Steve Hurst May 28, 2017
  
  Peter
  
  Venezuela is an oil company with a country attached and they want to keep credibility for the oil company or they have nothing
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Gerardo Rodriguez May 26, 2017

This idea sounds very good but actually would not change anything. Bond prices would certainly change with index inclusion but then non-index investors would come in and benefit from even higher yields. Venezuela will continue to avoid default at all costs because that is the way they preserve their only source of foreign currency.
A new reply to this comment has been posted.
Gabriel Villamizar May 26, 2017

No veo ningún dilema moral acá, no financias directamente a un Gobierno que tiene unas practicas económicas deplorables (y que no ha emitido deuda en muchos años), simplemente compras deuda que esta en manos de otros inversionistas.
De hecho, el mercado está castigando las malas practicas del Gobierno (y de Pdvsa) al exigirle un yield tan alto, pudiera decirse que esa es una actitud "moralmente correcta". Y esas malas practicas terminan afectando a la región (EMBI Bond Index). Dejar de medir la cuota de deuda de Venezuela es subestimar el riesgo crediticio de la región, como si de una cartera de crédito excluyeras una parte de los créditos malos.

Inviertes en ese tipo de bonos porque son de alto rendimiento, debido al alto riesgo. En ese riesgo se incluye el riesgo de que el Gobierno cambie de parecer y deje de recortar importaciones. No veo como puedes hacer que el Gobierno cambie sus políticas no comprando deuda que está en manos de otros inversionistas.

Saludos desde Caracas.
A new reply to this comment has been posted.
Stephen Siamai Kromah May 26, 2017

Well price is veil we don't always need to go under it.

Well this where price is veil for profit motive!
A new reply to this comment has been posted.
Stephen Siamai Kromah May 26, 2017

Well price is veil we don't always need to go under it.

Well this where price is veil for profit motive!
- Steve Hurst May 26, 2017
  
  This is meaningless unless you decide to put your capital at risk -
  which BTW is probably happening without you knowing it
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
M M May 26, 2017

The problem of Venezuala is political, the problem with the EU is political, the problem with the US is political, the problem with every country is political, the Top 10 Asset Managers, they strive on political uncertainities because political uncertainities drive yields up at other peoples (investors) expense. The whole financial system is a mess and regrettably is getting messier because it is still controlled and managed by the same people or organisations that were the root cause of the 2008 financial crisis.
- M M May 26, 2017
  
  Steve, this generation of politicians have no shame of what they have done to the current and future populations. Debts have mushroomed to historical levels and all they care about is promoting their own dismal image and in some cases, like BO cashing in on his destructive policies. After Hillary's speech yesterday, one cannot but say that the world has been saved big times.
  A new reply to this comment has been posted.
- Steve Hurst May 26, 2017
  
  M M
  
  '... the interest of the population is never on the top of their agenda but rather the "instability" of the financial system.'
  
  When guvnts become agents in partnership with banks they cease to be able to regulate effectively. If they were in a law court they would have to declare they had a conflict of interest.
  
  To most people debt is something you pay down. To a government it is an opportunity to spend somebody else's money because guvnts have no money of their own. It is like giving an individual their unborn childrens credit card to spend . I could understand that I ended up paying ww2 and Marshall Plan debts (something that had nowt to do with me), what I found more disturbing was that I was expected to pay Napoleonic war debts which were live until very recently. They simply had been rolled over again and again. There is in reality no intention by guvnts to paying debt down, only handing it on to subsequent generations. There are plenty of consumers of the benefits of debt and they vote accordingly - as Macron will find out in due course. As Renzi found out. The acceleration in debt is worrying to say the least because debt will dictate.
  
  Venezuela leadership has used petro funded debt to bribe voters but this spend has been based on a longer cycle than the markets. Susan George again - 'Markets can't think about anything beyond about three months. This is very long-term for markets, which is why the important things in life have got to be taken outside of the marketplace'. In fact again and again you see guvnts relying on markets to fund their long term grand ideas or abdication of responsibility, the Napoleonic war bonds being a case in point. Who expects to be paying bonds now for oak sailing ships, gunpowder, swords and a barrel of rum to ship Horatio Nelson back in
  A new reply to this comment has been posted.
- M M May 26, 2017
  
  Steve, Venezuela is a very rich country in natural and other resources. The ballot boxes in the case of Venezuela and many other countries did not work and you yourself mentioned in one of your other comments here on PS that any electoral map can be altered to suit the governing autocratic party or person. Debt is a product of a policy through various complex mechanisms. The policy makers are being put in charge to ensure that debt is kept under check and to some extent balanced. B. Obama wanted to reduce it for the US when he was a Senator, we all know how much this has mushroomed under his watch by the time he left office. Debt and the well being of the population at large is the responsibility of the political class, their advisors and the policy makers such as the Central Bankers. Regrettably, none of these parties is willing to communicate with the other and whenever they do, the interest of the population is never on the top of their agenda but rather the "instability" of the financial system. To correct the current dismal situation one needs honest leadership and this at the moment is very much in short supply. Up until recently, all unemployment data showed a very rosy picture until Brexit and the Trump phenomenon came into play and the politicians were exposed as to the true extent of their lies and the problems facing societies ( being the consumers or ultimate debt holders). So one must start any change from the top, democratic means have failed so now comes the rebellion (through Brexi, Trump, etc.), if the rebellion or the sound of alarms still do not work, there is always the Bastille II.....Too many alarm bells have been sounding for far too long.
  A new reply to this comment has been posted.
- Steve Hurst May 26, 2017
  
  M M
  
  If the problem is political then it can be sorted at the ballot box. If it cannot be sorted at the ballot box which appears to be the case then it's more than political. The root cause almost always seems to come back to debt growth. There is a boundary were debt is seen as a positive thing and where it becomes a negative thing and dominates policy. That decision is almost always external. Once decisions about debt and therefore the economic policy are made externally de facto loss of sovereignty occurs. The nuclear option is closing off access to rolling debt over. You know of a few good examples of this, one of whom is of particular interest to you.
  
  At this point I usually come across Susan George - 'Debt is such a powerful tool, it is such a useful tool, it's much better than colonialism ever was because you can keep control without having an army, without having a whole administration.'
  
  Venezuela problem is debt . The US's problem will be debt if it loses reserve currency status. The EZ's problem is very definitely debt and as clearly demonstrated by Greece there was no political answer and the Greeks voluntarily placed the albatross around their neck. 'God save thee, ancient Mariner'
  
  The nature of compound interest is such that the only escape is to spark inflation above the repayment rate and this is impossible whilst living in the NIRP domain
  
  I suggest looking at fractal mathematics. Below a certain value the end output is convergence to zero however slowly. Above a certain value the convergence is to expanding infinity however slowly. There is no middle ground. Fractal mathematics have many characteristics we observe in the real world
  
  So my response to you basically is the conflict is between national democracy and external decision making. Or to put it another way, a failure in the development of international democracy. Either way there is no solution without securing sovereignty and control of debt
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Steve Hurst May 26, 2017

High pricing due to risk is because there is risk

People who take risk are remarkably noisy when it pays off - in look how clever I am mode - and quiet when it doesnt. High risk failures do stack up regularly

By definition you need fewer high risk options to deliver than low risk options for the same return

I suspect the author is not an active high risk taker from the argument presented. Not once has reference been made to de facto capital loss, the talk has simply been about high risk investment return as though this positive result always happens
- Steve Hurst May 28, 2017
  
  Michael
  As Warren Buffet has repeatedly pointed out fund returns overall are not brilliant. In many case high risk returns simply cover other high risk losses. There are plenty of cases of 11 cent in the dollar purchases (Pimco for one) and some yield well. You dont hear about the ones that go sour. It is also quite possible to take haircuts and still remain in front, that happened with some of the GR bonds. If a return of 20% was guaranteed the price would collapse, thats the way it works
  A new reply to this comment has been posted.
- Michael Public May 27, 2017
  
  Karl Marx said something like this (quoted from memory):
  
  For 10% pa return you can always find an investor.
  For 20% pa return investors will compete to invest.
  For 30% pa return investors will break the law to invest.
  For 100% pa return investors will risk lives to invest.
  For 300% pa return investors will risk death to invest.
  
  Judging by the investors behavior Venezuela seems to be about a 100% return on investment. They achieve this by leverage - borrowing at 2% investing at 20%. They know exactly what they are doing and it is not all ignorant fund money.
  A new reply to this comment has been posted.
- Mayk De Freitas Santos May 27, 2017
  
  Sure.
  But you seem to miss the whole point of the article, which is based in moral grounds. Hausmann does not need to be a risk taker to make this plea. If you invest in this index you are directly contributing to starvation and human right abuses.
  A new reply to this comment has been posted.
A new reply to this comment has been posted.

https://prosyn.org/Ez696kP

The Hunger Bonds

PS Events: What Economics is Missing

New Comment

Contact us

Handpicked to read next

The Varieties of Populist Experience

Log in/Register

The Hunger Bonds

PS Events: What Economics is Missing

Handpicked to read next

Edit Newsletter Preferences

Set up Notification