A loudly ticking debt bomb appears ready to detonate in Venezuela as they face $4 billion of bond payments that are coming due in October and November. At this critical moment, Venezuela needs to reestablish representative democracy and reopen their economy; billions of dollars of financial support are available to them.
Venezuela’s debt challenge is pretty easy to understand. Under Chavezism, the country built up a mountain of debt to finance populist economic policies. While total debt is thought to exceed U.S. $150 billion, well in excess of the country’s GDP, focus falls on the $60 billion of bonds on which about $8 billion is due over the next year and $30 billion over the next 5 years.
The problem with a bond default is that it would expose Venezuela to huge legal and economic costs. Legally, following a default, Venezuela would not be able to safely sell oil into the U.S. market because aggrieved creditors would have no problem obtaining court orders to grab any tanker of government-owned oil that arrives in a U.S. port. This would force Venezuela to sell its oil at rock-bottom prices to intermediaries or to try to ship more of it to Russia or Asia for refining. As a result, Venezuela is under huge pressure to make its upcoming debt payments or to swiftly adapt to a future without access to the U.S. market.
Since new U.S. financial sanctions have made it illegal to help Venezuela raise new financing or restructure its debt, Venezuela has little room to maneuver. It could choose to default on its bonds, but that would hamper oil sales and could cause the Maduro regime to fall as many-a-government has following a sovereign debt default. Or the government could try to navigate the situation through a combination of squeezing the population through further reductions of food and medicine imports, additional bilateral loans, and an enhanced tie-up with China, Russia or Iran.
Whether the Maduro government defaults now or takes very unattractive actions to delay the inevitable, it is certain that as long as he stays in power the Venezuelan quality of life will remain miserable.
A regime change and outreach to the international community is the better way forward. Not only will the economy be more productive following a reopening, but a regime change followed by the reengagement with international financial institutions will unlock massive outside support.
To put a number on it, we have estimated that a new government could unlock over U.S. $50 billion dollars of financing to support a recovery of the economy. This large amount is justified by the scale of the devastation to the country’s social fabric, government finances, and infrastructure over the last decade.
To start, several billion dollars of emergency funds from the IMF and/or regional governments would be available to a transition government to provide humanitarian relief to help stabilize the social situation. But most importantly, in the context of a full reengagement with the IMF, Venezuela should be eligible for tens of billions of multilateral and bilateral loans as well as assistance in carrying out a comprehensive debt restructuring.
While Maduro might use the threat of bondholder actions as an excuse to move trade relations to the east, the reality is that the IMF, the U.S. and the U.N. have powerful tools at their disposal to help Venezuela reduce its debt load. The IMF could assist Venezuela in developing a proposal to creditors and help marshal support for the debt restructuring from G-7 countries, while a stay of litigation could be put in place to allow Venezuela to sell its oil without the risk of creditor attachment.
There are precedents here — a U.N. resolution was used to limit creditor attachments during Iraq’s restructuring of its Saddam-era debt and the IMF has helped many countries with the restructuring of their debts.
The U.S. government, the IMF, the World Bank or other parties will feel the challenge of making firm promises of large-scale support without a better understanding of the leadership that would replace a Maduro government. But given how close Venezuela’s debt bomb is to detonation, and the widespread economic and social impacts that are sure to follow, officials need to push their institutional limits to make a case for the political change that will unlock substantial outside support for the Venezuelan people.