Venezuela to restructure foreign debt, default looms as possibility
CARACAS, (Reuters) - Venezuela yesterday announced plans to restructure its burgeoning foreign debt, a move that may lead to a default by the cash- strapped OPEC nation whose collapsing socialist economy has left its population struggling to find food and medicine.
President Nicolas Maduro vowed to make a $1.1 billion payment on a bond maturing on Thursday, but also created a commission to study “restructuring of all future payments” in order to meet the needs of citizens.
Venezuela has few avenues to do that though because of sanctions by the United States that bar American banks from participating in or even negotiating such deals.
Thus, Maduro’s most readily available recourse to ease payments is unilaterally halting them.
“I am naming a special presidential commission led by Vice President Tareck El Aissami to begin refinancing and restructuring all of Venezuela’s external debt and (begin) the fight against the financial persecution of our country,” Maduro said in a televised speech.
Venezuela and stateowned companies have $49 billion in bonds governed by New York Law and promissory notes, according to New Yorkbased Torino Capital.
The government and state oil company PDVSA owe some $1.6 billion in debt service and delayed interest payments by the end of the year, plus another $9 billion in bond servicing in 2018.
The next hard payment deadline for PDVSA is an $81 million bond payment that was due on Oct 12 but on which the company delayed payment under a 30- day grace period. Failing to pay that on time would trigger a default, investors say.
“Without a team, without a communications strategy and without a plan, I see a restructuring impossible,” said Asdrubal Oliveros of Caracas-based Ecoanalitica. “However, if the government decrees a unilateral restructuring - they say ‘take it or leave it’ - that is an event of default.”
That would likely make countries less willing to do business with Venezuela, aggravating shortages of food and medicine and creating further problems for its all vital oil industry that is already hobbled by under-investment. Venezuela’s latest move could unleash a sovereign debt crisis of a scale not seen in Latin America since the massive 2001 default in Argentina that shut it out of global financial markets for years.
Wall St. for years pumped billions of dollars into Venezuela by way of bond purchases, passing off the revolutionary rhetoric of the ruling Socialist Party as bluster that belied an iron- clad willingness to pay its debts.
Maduro surprised many by maintaining debt service after the 2014 crash in oil prices, diverting hard currency away from imports of food and medicine toward Wall St. investors.
PDVSA carried out a debt renegotiation in 2016.
But that option was taken off the table after U. S. President Donald Trump levied sanctions blocking the purchase of new debt issued by Venezuela and government-owned entities.
Investors seemed puzzled by Maduro’s statements yesterday, which neither clearly declared default nor laid out a path to easing payment burden.
And a restructuring plan would not get investor support without a clear plan to create a functioning market economy, said Jorge Piedrahita of New Yorkbased Gear Capital Partners.
“I don’t think they’ve thought through the issues,” said Piedrahita. “You need an economic program with some credibility behind it, otherwise why would people give you the benefit of the restructuring?”
The mere presence of El Aissami on the new debt commission makes it a non-starter for U.S. financial institution. He was blacklisted this year by U.S. Treasury Department on accusations he is involved in drug trafficking. The increased pressure of the sanctions has already made banks more nervous about working with PDVSA, according to financial industry sources, leading to delays in simple operations.
PDVSA struggled for days to deliver funds for a bond payment due last week amid confusion over which banks were charged with transferring the money.
El Aissami on Thursday said settlement agent Euroclear had “blocked” a $1.2 billion bond payment.
Critics say Maduro’s decision to put debt above imports has taken a huge toll on the population.