Profiting from Venezuela bonds could mean starving the Venezuelan people.
Our bigger story will take us to the dilemmas of ethical investing.
Bonds or Food
The Venezuelan economy is in such dire straits that it needs to sell securities to finance oil production. Investors who want to buy their debt can go to JP Morgan’s Emerging Markets Bond Index. Although Venezuelan bonds are approximately 5% of the JP Morgan Index, their return has been much higher because they are so risky.
As you might expect, bond investors do not want to be paid with increasingly worthless bolivars. Instead, Venezuela needs to use its foreign reserves–the money it has in more dependable currencies like dollars–to service the bond payments.
Meanwhile, with soaring inflation and plunging oil prices, Venezuela’s economy has collapsed. Food store shelves are empty because of price controls. Looting is rampant and people are padlocking their refrigerators. Called the Maduro diet, the average Venezuelan is losing weight.
Although more imports could ease the crisis, the trend is in the opposite direction. In 2015, food imports were way down and they continue to shrink:
The reason imports are down? Venezuelan bondholders are getting the foreign reserves that could pay for food and medicine.
Our Bottom Line: Ethical Investing Dilemmas
At universities and municipalities, activist groups have asked that endowments and pension funds engage in ethical investing. For some that means no coal in a stock and bond portfolio. For others, no guns.
A divestiture list immediately creates questions. We can ask if divesting is really ethical. Is it okay if the school’s returns decrease and educational opportunities evaporate? Should the police have less pension money?
We can also ponder whether all divestiture demands are equally valid. I like to imagine a continuum ranging from good to bad and worse. In my mind there is a difference between avoiding firms that pollute and Venezuelan bonds that diminish food imports.
While we might prioritize our continuum differently, I hope we can all agree that like all decisions, ethical investing has trade-offs. There is never a free lunch.
My sources and more: During a fascinating Bloomberg radio interview, I learned about Ricardo Hausmann’s Project Syndicate column and continued reading about Venezuela’s debt tradeoffs in this Quartz article. Then, to complete the picture, I recommend WSJ and Vox for the food shortage facts and The Atlantic for ethical investing issues.