Flaws

Optimism has been the name of the game since Operation Absolute Resolve took Maduro out. Such optimism doesn’t just come from Venezuelans, where polls showed support for the intervention, but also from the investment community, which has flocked into the country to assess all kinds of opportunities. Since then, oil revenues have increased, driven not just by output increments but also by favourable price tailwinds and sanctions relief, which meant the reintroduction of Venezuelan crude into the global market. Today, Venezuela is the second largest source of imported crude in the United States, something unthinkable five months ago.

The petro dollars haven’t come in by themselves. A mechanism was designed so American officials could control how and where those funds would be deployed in order to avoid the disappearance of half of all oil revenues, as was the case under the previous administration. Additionally, licenses were granted to the BCV, new laws were passed for the hydrocarbon and mining sectors, with new MoUs being signed with international energy companies. Even macroeconomic data sets have been released for the first time in over a decade. So much appears to have changed that even multilaterals (chiefly the IMF) reemerged as crucial partners for a potential debt restructuring and stabilization program. Optimism is granted and the illusion of recovery does not come without merit, given the changes the country has experienced in less than five months.

However, that mirage breaks against the harsh reality on the ground and macroeconomic indicators that tell a different story. A year-to-date inflation of 90%, a 70% depreciation of the official exchange rate, and a widening gap between multiple dollar rates that continues to punish businesses and individuals alike. Meanwhile, the Bolívar printing press is working overtime while BCV reserves remain flat, deepening macroeconomic uncertainty and destroying what little credibility the institution still retained.

The almighty bond market will need far more than an Instagram post to bite the bait. Sovereign creditors respond to numbers, rules, and enforceability. Venezuela remains deeply deficient on those fronts.

None of this reflects an economy that is stabilizing, despite the interim authorities having a golden opportunity to do so. Instead, it reflects a government trying to politically manage deterioration without implementing the reforms necessary to stop it. 

The current model is not designed to solve the crisis but to preserve political control while generating just enough liquidity, oil revenue, and international flexibility to postpone its inevitable collapse. The interim authorities continue to rely on the same mechanisms that created the disaster in the first place with an unsustainable monetary expansion, exchange-rate distortions, opaque fiscal management, and complete control over all institutions. So while oil revenues and external prospects may have improved, the underlying structure of the economy remains unchanged. 

Refusing to address the obvious

A country benefiting from stronger revenues should be rebuilding reserve buffers and restoring institutional confidence, and prioritizing the reconstruction of the essential services. Instead, every dollar is consumed by a State that remains just too large, too inefficient, and politically unwilling to reform. The central bank continues injecting Bolívares into an economy where there is effectively no confidence that the currency can preserve value over time, nor in the institutional capacity to sustain credible long-term policy.

This lack of confidence is central to understanding our persistent inflation problem. It is not solely driven by the irresponsible monetary expansion but by high money velocity resulting from the complete lack of credibility in our currency. As soon as businesses and individuals receive Bolívars, they rush to buy dollars, inventory, or any asset capable of preserving value, accelerating velocity and pushing inflation into a spiral. This is not speculation; it is rational economic behavior in response to the collapse of trust in the Bolívar. Without restoring that confidence, inflation will remain entrenched.

The foreign exchange market remains one of the clearest indicators of the country’s fragility. As the gap between the official and parallel rate distort prices throughout the economy. The widening gap between the official and parallel exchange rates distorts prices across the economy, leaving businesses struggling to establish stable cost structures or expansion plans. International investors also face enormous uncertainty regarding how those multiple rates affect their ability to move capital in and out of the country. Meanwhile, the BCV continues wasting precious dollar inflows trying to defend an artificial exchange rate that is fundamentally unsustainable. 

Without institutional legitimacy, no restructuring effort or investment cycle will prove durable or beneficial for the country.

Addressing these distortions may still be too politically costly for Rodriguez. Closing the gap would require a fiscal discipline alien to chavismo, while also dismantling one of the most important corruption mechanisms for rewarding insiders. 

The solution appears straightforward: transition toward a system in which dollar-auction pricing is transparent and the USD is allowed to float. Furthermore, the government should let the dollars circulate freely, letting businesses and individuals use the greenback for both transactions and contract setting. While alleviating the economic distortions, this will also contribute to slowing the velocity, and keeping inflation under control. Venezuela should pursue this approach while keeping the Bolívar alive so it can gradually recover credibility through discipline and a coherent fiscal and monetary framework. 

Yet the changes necessary to stabilize the economy are the same changes that would reduce the government’s discretionary control over the economy. As previously argued, setting an independent board in the likes of Petroleos de Venezuela or the Venezuelan Central Bank would threaten the political hegemony of the interim authorities across all institutions.

What sound debt restructuring implies

The next collision with reality, where fundamental flaws will be hard to conceal, lies in the newly announced debt restructuring process. Interim authorities are about to face the almighty bond market which will need far more than an Instagram post to bite the bait. Sovereign creditors respond to numbers, rules, and enforceability. And on those fronts, Venezuela remains deeply deficient.

Venezuela’s total debt is estimated at $200 billion or about 200% of GDP. Despite Venezuela receiving a license to be able to hire Centerview, one of the most prestigious boutique firms in the market, any meaningful and fair progress would be impossible without a coherent macroeconomic plan bound by institutional legitimacy and backed by multilateral oversight, particularly from the IMF.

For Venezuela to avoid setting itself up for failure through a restructuring process that could hinder its financial capacity to grow sustainably, the Fund becomes an indispensable partner. The IMF would need to conduct an assessment of the country’s current financial stance via an Article IV consultation that hasn’t been conducted since Chavez withdrew from the organization. This assessment would be a key piece in understanding Venezuela’s repayment capacity and debt sustainability, setting the base from where to negotiate towards an agreeable debt haircut, tenor, and coupon.

Nothing will come out of the great opportunity created by the January events if there is no fundamental change over the who and hows of economic management.

An IMF-backed restructuring would eventually demand fiscal transparency, monetary discipline, reserve accumulation, independent oversight, and credible institutional reforms. Additionally, creditors will call for legal certainty and enforceable agreements that provide confidence that rules will not arbitrarily change once capital enters the country, or years later when investors seek to exit . To provide such guarantees, Venezuela would need a legitimate political and legal framework capable of signing long-term agreements recognized both domestically and internationally 

Without institutional legitimacy, no restructuring effort or investment cycle will prove durable or beneficial for the country. Proceeding without these elements would leave the country exposed to holdout creditors and future arbitration battles. The cornerstone for avoiding that is a credible electoral timeline that renews and legitimizes the National Assembly and executive power.

Yet that process is also set to collide with the interim authorities’ apparent intention to manipulate political timing in their favor. The current leadership wants the benefits of the stability phase brought in by oil revenue, sanctions relief, and fresh capital without surrendering the mechanisms of control that produced the crisis in the first place.

That formula is destined to fail. The authorities are neither serious enough nor committed to making the necessary reforms. In the meantime, we can keep going over the distortion caused by the exchange rate, what new law is being proposed or the deceiving debt announcement from last week. But nothing will come out of the great opportunity created by the January events if there is no fundamental change over the who and hows of economic management.

SACRAMENTO — California Democrats caught a huge break with Eric Swalwell’s sexual assault scandal. It surfaced in early spring rather than midsummer.

Just think of the Democratic debacle that could have occurred.

What if the accusations of sexual misconduct, including alleged rape, had come to light after the gubernatorial candidate had triumphed in the June 2 primary and qualified for the November ballot?

Under California law, it would have been impossible to remove him from the ballot and insert a Democratic replacement.

“It would have been pretty devastating,” notes Assemblywoman Gail Pellerin (D-Santa Cruz), who heads the Assembly Elections Committee.

“It has given us a lot to think about.”

There’s a glaring flaw in California’s election system that should be fixed for the future. But exactly how is trickier than it might seem.

Here’s what I’m talking about:

Prior to April 10 — doomsday for Swalwell — the then-congressman from the East San Francisco Bay was leading the large field of Democratic candidates for governor. Just barely. But he was starting to pull away, based on polling and endorsements.

A survey conducted by the independent Public Policy Institute of California just before Swalwell’s accusers went public showed him leading all candidates — Democrats and Republicans — with 18% support among likely voters.

He was closely trailed by Republican Steve Hilton, a former Fox News host, with 17%. Another Republican and a Democrat — Riverside County Sheriff Chad Bianco and billionaire climate activist Tom Steyer respectively — were tied for third at 14% each. Democratic former Orange County Rep. Katie Porter followed at 10%.

You can now toss all those numbers in the trash. But the point is that Swalwell was headed for victory in the primary. His next stop was the governor’s mansion because no Republican has won a statewide race in California in two decades.

The Democratic front-runner was raking in endorsements from interest groups and democratic politicians. He was considered the safest bet in a generally unimpressive field, a regular middle-class guy — and a white male, the only ethnicity and gender that has ever been elected governor in California.

Former state Controller Betty Yee, a Democratic darkhorse candidate for governor, was pretty much on target when she observed after Swalwell’s campaign collapsed:

“The obsession with who looks the part [of governor] almost got us an alleged sexual predator in Sacramento — ignoring the reality we need to actually fix our fraught state.”

But what if the victims of Swalwell’s alleged sexual improprieties — five women at last count — had waited a few more months to go public? And that’s conceivable. After all, they had remained silent for years. Apparently the nightmare of their alleged assailant becoming governor inspired them to talk now.

Although Swalwell quickly dropped out of the race, there’s no way to erase his name from the primary ballot. But at least voters can choose among seven other “major” Democratic contenders.

If he had already won in the top-two primary, however, and a Republican had also qualified for the November ballot, Democratic voters would have been left high and dry.

Presumably no sane person, no matter how partisan, would vote to elect an alleged rapist as governor. But the only other choice would have been a Republican lackey of President Trump. He’d undoubtedly win by default in a landslide.

“If Democrats had been stupid enough to nominate Swalwell, they’d have been stuck with him,” says Tony Quinn, a Republican elections analyst.

“Even dying doesn’t get you off the ballot. You don’t want to be the party nominee? So what, you are.”

No write-in candidacies are allowed in California’s general elections, although they are in the primary. That’s an inexplicable flaw.

“I’ve thought for years there should be a write-in option to deal with such a problem,” says UCLA law professor Rick Hasen, an expert on elections law.

Also, he points out, California’s top-two primary system — which advances only the top two vote-getters regardless of party — “cuts out minor parties from being relevant. You ought to be able to write in a minor party candidate.”

One reason a candidate can’t be removed from the ballot, election officials claim, is that tens of millions ballots have to be printed early enough to mail to every registered voter one month before election day.

Nonsense. In this era of rapidly expanding technology, you’d think that dilemma could be resolved even within snail-paced government bureaucracies. If nothing else, mail out a supplemental ballot just for the governor’s race.

But a bigger question is exactly who would choose the replacement for a departed candidate.

In a presidential election, the party hierarchy — a convention or national committee — would choose another nominee.

But there are no party nominees in California’s top-two open primary system. Parties don’t choose candidates for the November election. Voters regardless of their party do. So, in Swalwell’s case, the Democratic Party alone wouldn’t be entitled to select his substitute — unless the law were changed.

Or, perhaps the No. 3 vote-getter in the primary could automatically be elevated to the general election. We then could wind up with two candidates from the same party. But at least there’d be a better choice than an alleged sexual predator.

“I kind of miss those days” when parties nominated, says Pellerin, who was Santa Cruz County’s chief elections official for 27 years. “It’s something I’ve been thinking about — whether this is the best primary system.”

As I recently wrote, my vote would be to junk the top-two system and return to pre-”reform” party-nominating primaries.

Advocates of the top two primary — including myself — thought it would produce more centrist officeholders. It really hasn’t. It has just caused additional problems — like occasionally sending two candidates of the same party to the November runoff.

Meanwhile, all California voters should be grateful that Swalwell’s accusers courageously went public in April, not August.

What else you should be reading

The must-read: Swalwell supporters scramble after he drops out of governor’s race. Who will benefit?
California love: Californians are pouring money into Democrats’ Senate races in other states
The L.A. Times Special: There’s a wide gap between rumor and fact. That’s where Eric Swalwell lurked

Until next week,
George Skelton

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