Venezuela in cri­sis: what a debt de­fault means for bond­hold­ers

The coun­try’s de­ci­sion to re­struc­ture for­eign debt could have a far-reach­ing im­pact, warns Anna Isaac

The Daily Telegraph - Business - - Business -

Venezuela, with its ex­traor­di­nar­ily rich oil re­serves, is now crip­pled by debt, and has started to de­fault on bond pay-outs. Pres­i­dent Ni­co­las Maduro’s spin on the sit­u­a­tion is to claim that he is re­struc­tur­ing for­eign debt; slowly rene­go­ti­at­ing terms with Rus­sia – so far, Venezuela’s lender of last re­sort – and China.

A tweet from Delcy Ro­driguez, a long-term ser­vant of the suc­ces­sive Chavez and in­spired gov­ern­ments, reads that Venezuela has “ini­ti­ated a suc­cess­ful re­fi­nanc­ing of its debt. An imperial block­ade will not tar­nish Venezuela’s fi­nan­cial pres­tige.”

Black, it seems, is white, as far as the regime goes. But not on the bond mar­kets and not for rat­ings agen­cies: re­pay­ments of £200m have been missed, and credit rat­ings agency Stan­dard and Poor’s has de­clared the coun­try to be in “se­lec­tive de­fault”. It is joined in this ver­dict by fel­low agen­cies Fitch and Moody’s.

What does this mean for the hold­ers of what have been de­scribed as “hunger bonds”? And what might it mean for the starv­ing peo­ple of what was once con­sid­ered the shin­ing eco­nomic jewel of Latin Amer­ica?

Why won’t the In­ter­na­tional Mon­e­tary Fund step in?

There are two main rea­sons why the IMF – the world’s lender of last re­sort, which bailed out Greece and Ukraine among oth­ers in re­cent years – will not be step­ping in to aid Venezuela. One is the US – its sanc­tions regime against, and at­ti­tude towards, the op­pres­sive regime of Maduro, sup­posed heir to Hugo Chavez, is hos­tile.

The other is the sheer amount of money in­volved. Even if there were a regime change that sat­is­fied the US’s ob­jec­tions, the scale of the funds re­quired to re­struc­ture the coun­try’s fi­nances is vast.

IMF multi-year pro­grammes are limited to 435pc of a coun­try’s quota (that’s an amount it can ac­cess based on its rel­a­tive po­si­tion in the world econ­omy).

In prac­ti­cal terms that would mean $23bn (£17.5bn) over three to four years for Venezuela. It needs more like $32bn a year.

Who could lose money as a re­sult of the de­fault?

Bond­hold­ers who are owed $60bn. While it sounds ob­vi­ous, some ex­po­sure to debt may have reached quite sur­pris­ing places: most money has been mov­ing on the sec­ondary bond mar­ket.

The largest in­sti­tu­tional hold­ers of Venezue­lan debt are Fidelity In­vest­ment, $572m; T. Rowe Price, $370m; Black­Rock iShares, $222m; Gold­man Sachs, $187m; and In­vesco Pow­er­shares at $113m, ac­cord­ing to CNN. Pro­fes­sor Ri­cardo Haus­mann, a Har­vard-based ex­pert on Venezuela, told The Daily Tele­graph that there was un­likely to be any change to the sit­u­a­tion in the im­me­di­ate fu­ture.

Ob­servers need to com­pre­hend the level to which the econ­omy has im­ploded: “There is no eco­nomic plan,” he ex­plains. Oil pro­duc­tion is de­clin­ing sharply, and there is cur­rently no value be­ing cre­ated in the econ­omy.

Speak­ing last month, Casey Reck­man, an emerg­ing mar­kets ex­pert at Credit Su­isse, noted that the Ar­gen­tine re­struc­tur­ing process took roughly 15 years to be com­pleted.

“In Venezuela you have the ICSID (In­ter­na­tional Cen­tre for Set­tle­ment of In­vest­ment Dis­putes) claimants, the bond­hold­ers (Venezuela PDVSA – the state oil com­pany bonds), com­mer­cial ar­rears of the gov­ern­ment and with PDVSA’s sup­pli­ers, as well as large bi­lat­eral loans from coun­tries like China and Rus­sia,” she said.

In their lat­est meet­ing in Cara­cas with the au­thor­i­ties on Mon­day, rather than be­ing given clar­ity on the likely terms of any re­pay­ment, over 100 bond hold­ers, in­clud­ing some from New York, were given a goody bag with state-pro­duced choco­lates and cof­fee, but no clar­ity on fu­ture re­pay­ments.

That sounds funny at first, but Venezue­lan bonds are called “hunger bonds” for a rea­son. There are ac­counts of peo­ple break­ing into zoos to kill an­i­mals, so des­per­ate is their search for food.

£200m The debt re­pay­ments that have al­ready been missed by the gov­ern­ment of Venezuela as the econ­omy de­clines

Pro­tes­tors have taken to the streets to speak out against pres­i­dent Maduro’s regime

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