By: CLAUDIA A. GONZALEZ
Last week, rumblings from Venezuela indicated that there is an imminent need for debt restructuring in Venezuela as the Petróleos de Venezuela, S.A. (PDVSA) is slated to repay its debt obligation in the amount of $13 billion by the end of next year. In this regard, it seems Nicolas Maduro’s administration has been irresponsible, letting the debt restructuring crisis wane. In 2017, Venezuela’s GDP per capita is 40% less than it was 4 years ago; the minimum wage in Venezuela stands at $4 per month and inflation is estimated to be nearly 650% in 2017, with the potential to climb up to 2300% in 2018, according to the International Monetary Fund (IMF).
Investing and trading Venezuelan bonds is being hailed as one of the riskiest ventures in the market. Despite the risks associated with the Venezuelan markets, the Emerging Market Trade Association agreed to continue trading bonds with accrued interest instead of flat, which is an indication that investors believe the country will continue to service its debt moving forward.
Previously Lee Buchheit and Mitu Gulati, both experts on the subject, suggested a possible path for debt restructuring, which would call for new authorities taking office in Venezuela and enacting “some form of temporary standstill on creditor actions.” Under this mechanism, the IMF and a potential new administration would win some “time in which to assess the situation on the ground and allow the authorities, in consultation with the IMF and affected creditors, to formulate a plan for the treatment of outstanding liabilities”. Through this, the authors argued, a more cautious assessment could be taken to come up with a recovery plan.
Both experts believe that a debt restructuring under a Maduro administration was not a possibility because: a) for the Chavista regime it would not be in their best interest to default on its only assets and bonds, considering the new levels at which oil prices stand; b) the collaterals associated with a default for the Maduro administration are too risky; and c) China and Russia’s economic interest in Venezuela has the potential to complicate restructuring negotiations.
Venezuela´s debt is likely to be the messiest restructuring in the past 30 years, due to its sheer amount and complexity. To this day, the Venezuelan government has favored honoring sovereign debt payments over providing its citizens basic goods and medicines. It has done so because the government has understood that, unlike Argentina, Venezuela is in a much more vulnerable position, taking into consideration the possible seizure of its oil-related assets.
Nevertheless, with each passing payment date, doors continue to close on Maduro´s regime, and the possibility of a hard default by this government becomes more likely. Given the current sanctions and how much the IMF has stayed on the sidelines in Venezuela these past years, if the country does not resolve the current political issues at hand, the problem will extend beyond Venezuela into international financial systems.
With the recent sanctions that the United States has imposed on the Venezuelan government, another layer of complexity is added to the creditor structure. Venezuela would need to aim for debt restructuring of all its bonds together for it to be profitable, since without targeting US bondholders it seems pointless to only focus on European and Asian bondholders. At the same time, with the sanctions imposed by the Treasury Department, this would not be possible. Even if sanctions did not exist, to have any credible restructuring, there would need to be a clear plan of recovery for the economic situation in Venezuela, which might not be plausible without the assistance and oversight of the IMF.
Under the auspices of Russia’s membership to the Paris Club, along with China’s observer role, the possibility of restructuring still seems more attainable. Still, the first step would be to involve the IMF as a provider of external assessment, which is highly unlikely under Maduro’s administration, as they have vehemently opposed the policies of the IMF and the World Bank in the recent past. If it somehow was in Russia and China’s interest to involve the IMF on this, it would still take some time for the IMF and the World Bank to completely grasp the complexity of Venezuela’s situation, delaying the process of negotiating a restructuring.
Considering the US sanctions and how quickly the international financial system is closing up on Maduro’s regime, it would seem that the government has no other options than to continue to starve its population and serve its debt before it reaches capacity, defaults or considers restructuring. Nonetheless, international creditors should be wise to assess the scenario of default, since the first roadblock on the path to restructuring would be a diplomatic and political hurdle, where Russia and China may play a bigger role than they have in the past. This could potentially leave bondholders in the US and Europe with nearly a $170 Billion bill as a result of a power struggle.
Claudia A. Gonzalez is a Political Analyst with a background in economics. She is currently an Associate at Atheneum and holds a Master’s degree in Political Science. She has attended Pontificia Universidad Catolica de Chile, Universidad Catolica Andres Bello and the London School of Economics and Political Science.
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