Venezuela edges closer to chaotic debt default as Maduro clings on to power
VENEZUELA is to default within days in a sovereign bankruptcy of epic scale and complexity, threatening to cripple the country’s oil industry and set off a hyperinflationary collapse.
President Nicolas Maduro said Venezuela had been strangled by a financial blockade and would seek to restructure over $140bn (£107bn) of external debt immediately, a task deemed almost impossible under the constraints of US sanctions. The country cut its ties to the International Monetary Fund in 2007 and no longer has any legal access to an IMF restructuring package, even if it were willing to accept the fund’s draconian terms.
“Maduro can’t restructure the debt because nobody in the world trusts his government,” said Julio Borges, the head of the national assembly.
Yields on two-year Venezuelan bonds tripled overnight on Thursday to 176pc, flagging a creditor wipeout. Neil Shearing from Capital Economics says political decay has reached a point where there is no realistic hope of recovery. A successor government may legitimately repudiate the Maduro liabilities as “odious debt” under international law. “I don’t see any way out of this,” he said. The state oil company PDVSA made a final mysterious disbursement of $1.1bn yesterday, prompting claims that insiders linked to the regime held swathes in offshore centres. “After this payment, from today I decree a restructuring of the foreign debt and all Venezuelan payments,” said president Maduro.
The situation is now desperate. Roughly $800m is already overdue and the clock is ticking on the 30-day grace period. Rolling deadlines come next week. Cross-default clauses threaten to turn one missed payment into a cascading default. Foreign exchange reserves are down to $9.8bn. China is no longer willing to act as patron. It has already restructured some of its $23bn of bilateral loans. Mr Maduro has been relying on Russia as a last resort, and at a steep price. “Putin is gaining control of Venezuela’s oil reserves at bargain basement prices. He has subverted the Monroe Doctrine without firing a single shot,” said Helima Croft from RBC.
Even the Kremlin has lost patience. The Russian group Rosneft has become nervous about rising exposure after advancing PDVSA $6bn in exchange for future shipments of crude, a process that eats further into Venezuela’s avail- able income. Mr Maduro has been surviving day to day. Imports have been slashed by 75pc. Food and medicine have been rationed in a frantic effort to head off a default by PDVSA, fearing that this could choke supplies of spare parts, lead to a freeze in trade credit, and paralyse operations. Creditors might try to seize Venezuela’s refining assets and tankers abroad.
It has been a losing battle. PDVSA is cannibalising plants and running out of drilling equipment.
Oil output is falling by 200,000 to 300,000 barrels per day each year. David Fyfe from Gunvor said the risk of a complete collapse was growing, with effects large enough to eat into the global oil glut and drive prices higher.
Brent crude spiked to a 30-month high of $61.40 yesterday. It comes too late to rescue Mr Maduro. He hoped to hold out long enough to survive the oil slump but this is no ordinary crude cycle: the US shale revolution has broken Opec’s power and delayed recovery. Prices are still not high enough in any case to fund a state patronage machine and debt structure built on assumptions of $100 oil forever. Recourse to drastic austerity in order to keep paying foreign creditors evokes the hair shirt policies of Romania’s Ceausescu dictatorship in the Eighties. It has reached its political limits. Monthly inflation surpassed 50pc in October.