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
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