Latin America Advisor

A Daily Publication of The Dialogue

Will Venezuela Be Able to Restructure Its Billions in Debt?

Venezuelan Vice President Tareck El Aissami

President Nicolás Maduro this month called for a restructuring of Venezuela’s massive debt, estimated at $120 billion. The announcement led to a selloff in the country’s bonds and was seen as a sign that Maduro’s government may finally be reaching the limits of its ability to pay its debts. Russia later agreed to a $3.5 billion debt restructuring with Venezuela. How much success will Maduro have in restructuring Venezuela’s debt, and could such a move lead Venezuela to emerge from its economic crisis? Will support from foreign governments be enough for Venezuela to stave off default? What effect are U.S. economic sanctions having on Venezuela, and how would the sanctions inhibit a potential debt restructuring? What would a restructuring attempt mean for Maduro and his hold on power?

Charles Shapiro, president of the World Affairs Council of Atlanta and former U.S. ambassador to Venezuela: “I had the dubious honor of sitting through the opening ceremony of the Group of 15 in Caracas on Feb. 27, 2004. With tear gas wafting into the Teatro Teresa Carreño as the police tried to disperse a demonstration a few blocks away, I endured speeches delivered with great passion by Hugo Chávez, Zimbabwean President Robert Mugabe and Iranian President Mohammed Khatami. The rambling meeting of a group no one has ever heard of and the interminable speeches reinforced my cynicism about Venezuela’s future. Nicolás Maduro will no more be able to solve Venezuela’s economic woes than Mugabe was able to solve Zimbabwe’s. Maduro has yet to comprehend that he and his government are the problem, just as Mugabe was the problem in Zimbabwe. ‘21st Century Socialism’ means old-fashioned mismanagement, corruption and bad economic policy. Maduro’s plan seems to be to hold on until oil prices go up enough to save his government. While they may rise a bit over the short term, they’re not going to go up enough to stave off Venezuela’s collapse. Hedge funds, lawyers and consultants may make or lose money picking over the bones, but Venezuela’s default is inevitable. Venezuelan oil production is dropping by 20,000 barrels per month, and Venezuela’s international reserves are at a 15-year low. Russia and India may be willing to help Venezuela restructure, but it will be no more than a band aid. The short term is amazingly opaque, as the government makes up and then changes ‘facts’ to suit its purpose. But the challenge in Venezuela, as everywhere else, is that it is the long term that counts. The Venezuelan economy can no more survive Maduro than the Zimbabwean economy could survive Mugabe.”

Eva Golinger, attorney, author and former advisor to late Venezuelan President Hugo Chávez: “There is no question that the U.S. sanctions on Venezuela are having a profound effect on the  government’s ability to do business as usual. The uncertainty and fear that Venezuela’s assets abroad could be seized should the sanctions increase or a default be inevitable has led to an internal scrambling to delay the downward spiral of their economy. The country is in a severe financial crisis, and the toll of product scarcity, exorbitant inflation and widespread instability has left a majority of Venezuelans discontented with the government. Foreign partners such as Russia have provided temporary relief at enormous costs to the country’s sovereignty, which betrays the foundational principles of Hugo Chávez’s vision for Venezuela: independence, sovereignty and self-determination. Now, Venezuela may not be indebted to the IMF or the World Bank, but it has similarly relinquished control over its resources to Russia, which, while taking a huge risk on Venezuela’s financial solvency, gains enormously in influence and geopolitics just south of the United States. The temporary relief also gives breathing room to the Maduro government to push forward political measures and unpopular actions that could ensure its permanence in power. U.S.
sanctions have provided an easy scapegoat for Venezuela’s financial woes, and while a majority of chavistas view the current situation as bleak, they are loath to oppose Maduro because they believe the economic crisis has been caused by external sabotage by minimal fault of the government. I would just caution those who believe Venezuela is on the verge of default and regime change. Venezuelans have an uncanny ability to creatively and unexpectedly overcome perplexing obstacles. As many used to say in the Chávez government, ‘the most we know is that no one knows.’ ”

Luis Vicente León, president of Datanalisis in Caracas: “As a country that is dependent on oil, PDVSA’s failure to pay can trigger lawsuits affecting Venezuela’s cash flow. However, there is a huge difference between not paying off a debt and paying it late, which is what has happened until now. The holders of these bonds have three options: 1.) Those who have insured by using derivatives will charge. 2.) All bondholders can request an acceleration of outstanding debt payments. In that case, the total amount of the issue would go into default and judicial proceedings would start. However, this does not seem to be the most likely scenario. Those who received late payments should prefer to bet on continuing to collect and waiting for an orderly refinancing. However, if they think that PDVSA’s move is to buy time in order to protect its assets and make a planned default, then they could act immediately. With more distrust, bond prices will plummet and could facilitate repurchases by Venezuela’s allies, such as Russia, China or India. 3.) The most likely action is a Venezuela seeking a debt renegotiation. For that, the government must be willing to validate the National Assembly, and the opposition would have to legitimize the refinancing. And in exchange for a political negotiation, the Trump administration would have to relax sanctions against Venezuela, and creditors would have to accept the conditions proposed by Venezuela’s government. It would be a complicated scenario, but not an impossible one.”

Richard Francis, director of Latin American sovereigns at Fitch Ratings: “Fitch Ratings lowered Venezuela’s rating to Restricted Default on Nov. 14, a day after the 30-day grace period ended on two of the government’s bonds. Fitch also has lowered PDVSA’s rating to RD as well on the company’s failure to make timely payments on its commercial debts. Maduro’s call for an external debt restructuring is an acknowledgement of the country’s serious economic and financial problems that make payment of debt difficult. The country will enter its fifth year of deep economic  contraction next year while hyperinflation is gathering pace. While bilateral debt restructurings with India and Russia will provide Venezuela with some breathing room, it is unlikely to meaningfully alleviate the country’s financial problems. The intensified U.S. sanctions implemented at the end of August certainly have negatively affected Venezuela (Fitch downgraded the ratings to CC after the sanctions announcement). Over the last two months, they have caused logistical nightmares with the international financial system (including correspondent banking, transfer agents and suppliers) for the government and perhaps more importantly limited the government’s financing options by specifically outlawing new debt issuance as well as targeting some non-market debt held by Venezuela’s public sector. Going forward, the sanctions severely limit the government’s options to restructure its debt. On the political front, the regional elections held on Oct. 15 seem to have strengthened the government’s hand and left the opposition divided, at least in the near term. The default is unlikely to change the political dynamic. Further intensified sanctions by the United States or a broadening of sanctions by other governments could conceivably put significant pressures on Maduro’s regime, however.”

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