In­sol­vency threat­ens to crip­ple Venezuela

Maduro ce­ments power, but a loom­ing debt cri­sis could be the tip­ping point


caracas, venezuela — The au­to­cratic gov­ern­ment of Pres­i­dent Ni­colás Maduro is sharply in­ten­si­fy­ing its crack­down on dis­sent, is­su­ing ar­rest war­rants for re­bel­lious may­ors, tar­get­ing un­friendly politi­cians and men­ac­ing av­er­age cit­i­zens who speak their minds. Yet if it’s en­e­mies of the state Maduro is af­ter, one threat looms larger than any other.

That would be the flatlin­ing Venezue­lan econ­omy.

This South Amer­i­can na­tion is edg­ing to­ward the eco­nomic brink af­ter an in­ter­na­tion­ally con­demned elec­tion last month cre­ated an all-pow­er­ful congress loyal to Maduro. Since the July 30 vote, the value of the lo­cal cur­rency, the bolí­var, has fluc­tu­ated more wildly than ever, a sig­nif­i­cant feat for a coun­try sad­dled with the world’s high­est in­fla­tion rate. As a re­sult, street prices for sta­ples such as bread and toma­toes have dou­bled in less than two weeks.

New es­ti­mates from the large Venezue­lan data firm Ecoanalítica sug­gest that the econ­omy could shrink 10.4 per­cent this year, ex­ac­er­bat­ing a four-year nose­dive that some econ­o­mists al­ready call worse than the United States’ Great De­pres­sion. Po­ten­tially more dan­ger­ous, an­a­lysts say, is the prospect of a sovereign debt cri­sis that could bring the coun­try to a whole new level of eco­nomic pain.

The de­te­ri­o­rat­ing sit­u­a­tion comes as Pres­i­dent Trump on Fri-

day said that he would not ex­clude a “mil­i­tary” op­tion in Venezuela. The spi­ral­ing eco­nomic cri­sis is send­ing a fresh jolt of panic through cri­sis-hard­ened Venezue­lans, who are in­creas­ingly blam­ing Maduro.

“It was af­ter the vote that things went out of con­trol,” said Miguel Gonzalez, a 94-year-old re­tiree in sticker shock this past week while shop­ping at a Caracas gro­cery store. In only a few days, he noted, the price of white cheese had jumped 21 per­cent, while stew­ing meat surged 31 per­cent. Like many other shop­pers, he had a nearempty cart.

The gov­ern­ment nor­mally ad­justs pen­sions and the min­i­mum wage to com­pen­sate for in­fla­tion. But in a pos­si­ble sign of empty cof­fers, it hasn’t done that yet. As anx­ious Venezue­lans bought up U.S. dol­lars in the week af­ter the vote, the lo­cal cur­rency de­pre­ci­ated 45 per­cent against the dol­lar. In the past week, the bolí­var clawed back lost ground — but price in­creases on the street re­mained in place.

“It’s the gov­ern­ment’s fault,” Gonzalez said bluntly be­fore leav­ing the store with only a bag of pota­toes. Nearby, 62-year-old Mar­garita Rivero, who lives on the equiv­a­lent of $15 a month, sounded a note of de­spair. A kilo of meat — 2.2 pounds — now costs about $2.50, or 16 per­cent of her monthly wage.

“God save us,” she said. “We will all dis­ap­pear if we keep go­ing like this.”

Venezuela has sunk into fi­nan­cial malaise on the back of a so­cial­ist ex­per­i­ment launched by Hugo Chávez, the left­ist fire­brand who died in 2013 af­ter na­tion­al­iz­ing gold mines and rice mills, among other en­ter­prises, and bring­ing more of the en­ergy sec­tor un­der state con­trol. Since then, the econ­omy has suf­fered a far more pro­found col­lapse un­der Maduro, Chávez’s anointed suc­ces­sor, the re­sult of plum­met­ing oil prices, mis­man­age­ment and failed eco­nomic poli­cies in­clud­ing price and cur­rency con­trols.

Yet af­ter a four-month street up­ris­ing in which more than 100 peo­ple were killed and thou­sands ar­rested, the op­po­si­tion ap­pears frac­tured and in dis­ar­ray. An­a­lysts say Maduro’s longevity in of­fice may now de­pend less on sur­viv­ing an op­po­si­tion chal­lenge than on his abil­ity to side­step a cat­a­strophic debt cri­sis.

Al­ready, Venezue­lans are fac­ing half-day-long bread lines and short­ages of basics from toilet pa­per to an­tibi­otics. But a de­fault on the na­tional debt could gen­er­ate even harsher do­mes­tic con­di­tions, po­ten­tially dam­ag­ing Maduro’s sup­port within the armed forces, his ul­ti­mate line of de­fense.

Signs of dis­con­tent among lowand mid-rank­ing of­fi­cers have be­gun to sur­face. On Sun­day, a group of civil­ians and sol­diers, ap­par­ently led by a for­mer com­man­der, at­tacked a mil­i­tary base in the city of Va­len­cia af­ter re­leas­ing a video pledg­ing re­bel­lion against the gov­ern­ment.

The crum­bling econ­omy, ex­perts say, could fan such flames. And in the wake of last month’s vote, some an­a­lysts in­creas­ingly see de­fault as not only pos­si­ble but likely.

“De­fault is in­evitable. The ques­tion is tim­ing,” said Siob­han Mor­den, man­ag­ing di­rec­tor and Latin Amer­ica ex­pert at No­mura Hold­ings. “Do they run out of money [on their own]? Or do U.S.-sec­tor sanc­tions force them to run out of money sooner?”

Venezuela has man­aged to avoid a de­fault largely for two rea­sons. First, it is a huge ex­porter of oil. And sec­ond, Maduro’s hardleft gov­ern­ment has, iron­i­cally, been will­ing to work with Wall Street cap­i­tal­ists on cre­ative bond deals that have kept it afloat.

But Maduro’s de­fi­ant de­ci­sion to pro­ceed with last month’s vote could prove a game changer.

Crit­ics de­cried the elec­tion as a sham meant to bring all branches of gov­ern­ment un­der his con­trol, and the United States, along with coun­tries in Europe and Latin Amer­ica, have re­fused to rec­og­nize the new Con­stituent As­sem­bly. As Venezuela be­gins to re­sem­ble a pariah state, ex­perts say that traders may be loath to ac­cept more of the risky debt swaps — the pay­ing off of old debt with new and higher-yield­ing bonds — that have thus far kept de­fault at bay.

It will also be harder, mean­while, for Venezuela to cover its for­eign debts us­ing cash. Na­tional re­serves have hit a 15-year low of about $10 bil­lion, most of it in gold bars, not cash. Any U.S. ac­tion to tar­get the coun­try’s oil in­dus­try through sanc­tions — a step the Trump ad­min­is­tra­tion is con­sid­er­ing af­ter a string of sanc­tions on in­di­vid­ual of­fi­cials — could force a de­fault-trig­ger­ing cash crunch.

Even if the U.S. gov­ern­ment stops short of that, Venezuela’s oil in­dus­try, bat­tered by cor­rup­tion, mis­man­age­ment and dis­re­pair, has al­ready seen its out­put drop by 20 per­cent in two years.

An­a­lysts sug­gest a de­fault is likely within 18 months, pos­si­bly much sooner. This year, Venezuela’s big test will be in Oc­to­ber and Novem­ber, when it must scrape to­gether $3.8 bil­lion in pay­ments.

Robert Wood, the Economist In­tel­li­gence Unit’s re­gional man­ager for Latin Amer­ica and the Caribbean, puts the chances of a mil­i­tary coup this year or next, be­cause of ex­treme eco­nomic con­di­tions, at about 40 per­cent.

“We no longer ex­pect that the De­cem­ber 2018 pres­i­den­tial elec­tion will be held as sched­uled,” he wrote in an anal­y­sis note. “We still ex­pect that the op­po­si­tion will take power, but that the fall of the gov­ern­ment and con­se­quent tran­si­tion will be dis­or­ga­nized, trig­gered by eco­nomic dif­fi­cul­ties such as a de­fault and/or hy­per­in­fla­tion.”

Some ob­servers ar­gue that ceas­ing to pay the debt could ac­tu­ally give the gov­ern­ment more to spend on des­per­ately needed im­ports of food and medicine, although any wind­fall would prob­a­bly be short-lived, given that for­eign in­vestors are poised to quickly seize Venezue­lan as­sets across the globe.

There is also rea­son to be­lieve that Maduro could sur­vive a worst-case eco­nomic cri­sis by un­leash­ing still more of­fi­cial re­pres­sion — as he is show­ing signs of do­ing.

Since July 30, the pro-gov­ern­ment supreme court has is­sued ar­rest war­rants for five lo­cal may­ors for sup­port­ing protests. Mean­while, the Con­stituent As­sem­bly has vowed to back Maduro’s pub­lic calls to im­prison more op­po­nents, cre­at­ing a “truth com­mis­sion” this week that ob­servers fear will be used to per­se­cute gov­ern­ment crit­ics. Last week­end, it sacked chief pros­e­cu­tor Luisa Ortega Díaz, the most im­por­tant anti-Maduro voice left in the ad­min­is­tra­tion.

Maduro is also sin­gling out or­di­nary cit­i­zens. On Sun­day, a pro­gov­ern­ment elec­tion of­fi­cial was shouted at by shop­pers in a Caracas su­per­mar­ket. A video of the scene went vi­ral, prompt­ing Maduro to call for those re­spon­si­ble to be jailed for “hate crimes.”

As a model for the fu­ture, Maduro may look to Cuba dur­ing its “spe­cial pe­riod” in the late 1980s and 1990s, when Fidel Cas­tro sur­vived a years-long hunger cri­sis af­ter the col­lapse of the Soviet Union.

“His regime, like [Robert] Mugabe in Zim­babwe and [Bashar al-] As­sad in Syria, has al­ready man­aged to sur­vive an im­plod­ing econ­omy, and I don’t know that a worse eco­nomic per­for­mance will do him in,” said Ri­cardo Haus­mann, a for­mer Venezue­lan plan­ning min­is­ter who is di­rec­tor of the Cen­ter for In­ter­na­tional De­vel­op­ment at Har­vard Univer­sity.

“The thing is, the Venezue­lan peo­ple are now so poor and so hun­gry that many of them don’t have the band­width to mo­bi­lize in op­po­si­tion,” he said.

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