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Venezuela: what happens now after official default
Robin Wigglesworth | November 14, 2017
Robin Wigglesworth | November 14, 2017
Rating agency S&P on Monday night confirmed what many analysts and investors have been bracing for in recent years: Venezuela is officially in default on its sovereign debts, after missing $200m of interest payments on two government bonds.
Yet there remain more questions than answers surrounding Venezuela’s plans to “refinance and restructure” its financial liabilities, and the path forward for the oil-rich but economically stricken Latin American country.
How much does Venezuela owe?
Venezuela has about $63bn of foreign bonds outstanding, according to Torino Capital, while the central bank estimates the country’s overall foreign debts at about $90bn. The real number, say most analysts, is much higher.
PDVSA, the state oil company, has sold $28.6bn of bonds and owes billions of dollars more in “promissory notes”.
Venezuela owes another $4bn or so to creditors that have taken it to the World Bank’s ICSID court. Stuart Culverhouse, chief economist at Exotix, thinks total public sector external debts range between $100bn and $150bn.
What does Venezuela want to do?
Even this is uncertain. Venezuelan president Nicolás Maduro has mentioned “refinancing” and “restructuring” the country’s external liabilities.
But a refinancing usually implies something voluntary while a restructuring means forcibly “haircutting” creditors. Crucially, US sanctions imposed this summer in practice means both options are off the table.
That Mr Maduro named vice-president Tareck El Aissami as the lead negotiator with bondholders complicates matters further. Mr Aissami has himself been sanctioned by the US as an alleged narcotics trafficker, which means US investment groups — the biggest holders of Venezuelan debt — cannot enter talks with him.
That led to most international bondholders staying at home rather than risk being inadvertently snared by US sanctions and, as a result, it was a “non-event”, said Siobhan Morden, head of Latin American fixed income strategy at Nomura, noting that only 10 non-Venezuelan investors might have been in attendance.
“There was no official statement on the missed coupons despite what would have been an ideal venue to clarify. The doublespeak continues with officials insisting on debt reprofiling while at the same time committed to pay their debt,” she wrote in a note to clients.
So why is Venezuela doing this?
With a competent government and more orthodox economic policies, Venezuela could probably handle its debt burden. Although oil exports are declining, it still boasts the world’s largest proven reserves and prices are at their highest level for more than two years.
But chronic mismanagement by governments under Hugo Chávez and now Mr Maduro and the oil slump has taken its toll. According to the IMF, the economy has shrunk by a third over the past five years.
Worries that a default would trigger creditor lawsuits that could imperil its vital oil export revenues have spurred Venezuela to stay current much longer than many expected. It has managed this largely through largesse from China and Russia and pushing the hardship on to ordinary Venezuelans by sharply limiting imports.
The country’s options appear limited. In addition to Monday’s missed payments on bonds due in 2019 and 2024, Venezuela is overdue on $420m of coupons on $8.6bn worth of bonds that mature in 2023, 2025, 2026 and 2028, demonstrating the “significant fiscal strain” the country is facing, S&P notes.
Foreign currency reserves are below $10bn — and much of this is in gold that will be hard to liquidate. China is wary of deepening its financial exposure to Venezuela while the country has already restructured some of its bilateral loans from Russia.
How have markets reacted? Badly. The price of Venezuela’s bond maturing in October 2019 collapsed from nearly 50 cents on the dollar to about 24 cents last week, as investors panicked after the restructuring announcement and bank traders pulled out of the market, causing prices to “gap” lower. The price recovered slightly on Monday, before tumbling again on Tuesday after it went into default.
Some investors have hoped that the difficulty Venezuela would face in restructuring its debts — coupled with a less onerous payment schedule in the coming months — might allow breathing room until later in 2018.
But missing Monday’s payment deadline on its sovereign debt makes that look overly optimistic. The increasingly dour view is reflected in the cost of Venezuelan credit-default swaps, a kind of debt insurance, that has spiralled higher since the restructuring announcement.
Can Venezuela extricate itself from this mess?
Russia could provide a loan secured by Venezuelan oil assets that the government could either use to pay creditors or to buy back some of its bonds at their current big price discount.
Venezuela could also seek to improve its fiscal space by separating PDVSA from the state, defaulting on the latter debts while staying current on the oil company’s bonds. That could in theory prevent creditors from interrupting PDVSA’s oil sales, while letting Venezuela’s sovereign creditors stew. Suing countries is much harder than companies with assets that can be seized.
Venezuela’s state debts could in theory be restructured without a traditional debt exchange, through co-called “collective action clauses” that bind all creditors to any deal agreed by a certain majority. PDVSA’s bonds don’t have CACs but Venezuela’s mostly do, which could allow those bondholders to vote to agree a restructuring without falling foul of US sanctions.
Could that work?
Probably not. Restructurings are usually backstopped by an economic adjustment programme, to give creditors the confidence that the losses they swallow will result in a durable turnround. “Unless the government can persuade creditors of its ability to repay future debts, it’s difficult to foresee a point from which any successful renegotiation can begin,” says Edward Glossop of Capital Economics.
Moreover, ringfencing PDVSA from the government will be tricky. Crystallex, a Canadian miner, is already suing Venezuela and arguing that PDSVA is the “alter ego” of the state. If Crystallex wins, it opens the door for all creditors to try to seize Venezuelan and PDVSA assets interchangeably.
The most likely outcome, investors and analysts say, is a protracted period of financial limbo with a restructuring precluded by US sanctions and Venezuela facing a barrage of lawsuits that will tie it up for years to come.
https://www.ft.com/content/5f07e298-c326-11e7-a1d2-6786f39ef675
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