Financial Times: Venezuela debt restructuring could unleash crisis

 Financial Times

Venezuela debt restructuring could unleash crisis

Any strategy will be complicated by US sanctions imposed in August
Venezuela aims to restructure all foreign debt Despite a recession, hyperinflation and falling oil production, debt restructuring was a move Nicolás Maduro, Venezuela’s president, had long-rejected until now

President Nicolás Maduro’s decision to restructure Venezuela’s $89bn of debt is likely to unleash a debt crisis of a size not suffered in Latin America since Argentina’s massive 2001 default, and a bond restructuring that lawyers say would be the world’s most complex yet.

In a televised address on Thursday, Mr Maduro said state oil company PDVSA would make one more $1.1bn debt payment on a bond due in 2017 and then restructure its remaining obligations with banks and investors.
“I decree a refinancing and restructuring of external debt and all Venezuelan payments,” Mr Maduro said, stressing that Venezuela had always honoured its obligations, had the funds to continue doing so, but was being hindered by US financial sanctions.

“We’re going to a complete reformatting. To find an equilibrium, and to cover the necessities of the country, the investments of the country,” he added.

Economists have long-predicted Venezuela would eventually make such a move as funds drained from the socialist government’s vaults to pay bondholders, forcing an 80 per cent cutback in imports over the past five years. Indeed, Venezuelan bonds already trade at default prices, and foreign reserves of $10bn are near 20-year lows.

Yet despite a recession worse than the Great Depression, hyperinflation and falling oil production, debt restructuring was a move Mr Maduro long-rejected. In large part, that was because it could lead to default, and creditors would then seize Venezuelan oil shipments and foreign assets, including PDVSA’S US refinery, Citgo.

As a result, the $7bn that Venezuela might save in 2018 from not servicing its debts would be offset by lost oil exports, and there would be no net gain.

If they [Venezuela] continue making payments, bondholders will have little incentive to participate in a deal Francisco Rodriguez, Torino Capital

That calculus still holds. Indeed, a desire to remain on good terms with creditors may explain Mr Maduro’s apparently nonsensical decision to restructure debts after making a particularly large bond payment this week — more than $1bn that instead could be used to import desperately-needed medicine and food. (A more cynical rumour is that the money went to government insiders who own the paid 2017 bond.)

Venezuelan imports are forecast to be just $13bn this year. Against that, the country has $63bn of traded debt, owes another $5bn to international lenders such as InterAmerican Development Bank, $17bn to China and another $3bn to Russia.

“We interpret Maduro’s statement [to honour debt payments during the renegotiation process] as indicative of the government’s intent to refinance its external obligations rather than a decision to make a take-it-or-leave-it offer to bondholders,” Francisco Rodriguez of Torino Capital wrote in a note to investors.
However it is also a move likely to fail. “If they [Venezuela] continue making payments, bondholders will have little incentive to participate in a deal,” Mr Rodriguez said.
Alternatively, “if they [Venezuela] stop making payments, then they would leave themselves open to the possibility of attachment of their external assets, including . . . oil shipments.”

One reason why Mr Maduro may feel he can get away with it is that he feels empowered politically at home.

In August, after a referendum that the makers of Venezuela’s electronic vote-tallying system said was fraudulent as it over-estimated the government’s tally by 1m votes, Mr Maduro set-up an all-powerful Constituent Assembly that suborned the opposition-controlled parliament.

Then, at October 15 elections for state governors in which the government did far better than expected, “he not only perfected a rigged electoral system . . . but also managed to inflict a fatal blow to the opposition,” Luisa Palacios, analyst at Medley Global Advisors, said.

Although Mr Maduro may feel in control domestically, abroad is another matter. Any debt restructuring is complicated by US sanctions imposed in August, which block US-regulated institutions and investors from buying new Venezuelan bonds, as would be issued in a typical debt restructuring.

Adding to the difficulties, vice-president Tareck El-Aissami, who will lead the process, has been sanctioned by the US for alleged drug-trafficking and money laundering.

“The [Venezuelan] Republic and national oil company PDVSA are facing what may be the most complex and challenging sovereign debt restructuring yet,” experts Mark Walker and Richard Cooper warned in a recent paper. Recommended How Venezuela’s ‘Bolivarian bourgeoisie’ profits from crisis Watch: Is Venezuela dismantling its democracy? Venezuela’s path to a debt restructuring grows more treacherous

Furthermore, even if Venezuela seeks to get around the US sanctions by issuing restructured bonds in other currencies, authority for that would come from the Constituent Assembly — which Canada, the EU, the US, and 11 of Latin America’s biggest countries, including Brazil and Mexico, do not recognise.

“Nobody is going to restructure debt with a government [based] on the fraudulent constituent assembly,” opposition leader Julio Borges said.

Renowned economists such as Ricardo Hausmann have long said Venezuela should restructure its debt, as they consider paying bondholders while Venezuelans go hungry to be immoral. But they recommend it as part of a broader economic restructuring backed by the International Monetary Fund.

Indeed, the IMF has already crunched the numbers on the amount of help — upwards of $30bn annually — that could accompany such an approach. But international institutions will not extend such help to a government that has become a by-word in corruption and economic mismanagement — and is now near-bankrupt despite the world’s largest energy reserves.

Government insiders stole $300bn of the $1tn windfall that Venezuela received during the oil price boom of the 2000s, according to disaffected former ministers. Meanwhile, a socialist government that claims to help the poor presides over a country where 82 per cent of households live in poverty — twice as high as when it came to power in 1999.

“Now starts the debate into whether a default has the potential to lead to regime change,” Ms Palacios said. “We fear that the answer to that question will take . . . much time to figure out.”

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