Troubled Venezuela hovers on edge of default

Creditors postpone ruling on whether state oil company officially defaulted on debt repayments as problems mount.

A man holds a new one hundred thousand-Bolivar-note in Caracas.
A man holds a new one hundred thousand-Bolivar-note in Caracas. Foto:AFP/FEDERICO PARRA
Decision day on a looming Venezuelan default was dramatically pushed back yesterday after a committee of creditors postponed a ruling on whether state oil company PDVSA had officially defaulted on its debt repayments.

The creditors, represented by 15 financial firms at a meeting in New York, agreed to meet again on Monday – the same day President Nicolás Maduro has summoned creditors to Caracas to discuss reschedulingVenezuela’s massive US$150- billion debt. For the moment the decision of the so-called Determinations Committee, which met in New York “to discuss whether a Failure to Pay Credit Event had occurred” on a due PDVSA bond, throws Maduro something of a lifeline. PDVSA is a crucial part of the infrastructure of the country, which sits on the world’s largest oil reserves. A default by the oil company responsible for 95 percent of the nation’s exports would trigger the almost immediate seizure of assets like crude-laden oil tankers and its US subsidiary Citgo’s refining activities and gas stations. Analysts bel ieve a default is inevitable, but the oil company’s easily accessible foreign assets make it more likely that Maduro will continue to repay PDVSA’s debt, at the possible expense even of sovereign debt, which has few assets abroad.

The Maduro government had said it would make a US$1.2- billion payment on a PDVSA bond November 2, but the funds never reached creditors. About 70 percent of Venezuelan bondholders are North American, according to government figures. The government also has a deadline Friday for another US$81 million on another PDVSA bond.

At least US$1.47 billion interest on various bonds is supposed to follow by the end of the year, and then about US$8 billion in 2018.

However, the country has less than US$10 billion in hard currency reserves.

CREDITORS. The owed funds comprise at least US$60 billion in tradable sovereign paper and an estimated US$90 billion more held by China, Russia and creditors to state oil company PDVSA. One financial institution acting for bondholders, Wilmington Trust, declared Friday that missed payments of US$650 million from Venezuela’s electricity company Corpoelec, due this week after a grace period expired, officially constituted a default event.

Major credit rating agencies Fitch, Moody’s and Standard and Poor’s have all downgraded Venezuela’s standing in recent days. “One way or another, the government and PDVSA will default.

We are in the end-game and it’s now become a matter of days, not weeks, until default is confirmed,” Edward Glossop of Capital Economics said in a note.

A default would immediately cut Venezuela off from international financial markets, removing its capacity to borrow. Greatly complicating its situation, Washington has banned it from any new debt transactions in the US market.

SANCTIONS. On Thursday, Washington upped the economic pressure by sanctioning 10 officials it said engaged in state election irregularities on October 15, when pro-Maduro candidates unexpectedly won 18 of 23 gubernatorial seats.

The sanctions named government ministers and members of Venezuela’s National Electoral Council and the new, all powerful Constituent Assembly which has replaced congress. For instance, one of the people sanctioned, Sandra Oblitas Ruzza, vice-president of the National Electoral Council, announced the relocation of polling stations just days before the voting, the US said.

Also among those designated was Elvis Eduardo Hidrobo Amoroso, second vicepresident of the Constituent Assembly. Culture Minister and former information minister Ernesto Emilio Villegas Poljak, the head of Venezuela’s state telephone utility Manuel Ángel Fernández Meléndez, Urban Agriculture Minister Freddy Alirio Bernal Rosales and current ambassador to Italy, Julián Isaías Rodríguez Diaz were named too.

The sanctions effectively freeze those named out of much of the global banking system, requiring most international banks not to process transactions on their behalf, and block their access to any assets under US jurisdiction.

Sanctions imposed by President Donald Trump’s administration in August banned US trade in any new bonds issued by the Venezuelan government or PDVSA – a needed step in any restructuring of the oil-rich country’s debt. The only bright spot is Russia saying it had agreed to ease debt repayments for more than US$3 billion that Venezuela owes it, with a formal accord to be signed within a week.

For a country with the world’s largest oil reserves – which the country estimates at nearly 300 billion barrels, worth more than $15 trillion – such debt should be bearable. But decades of mismanagement, destruction of Venezuela’s private sector, lack of infrastructure investment, rigid currency controls and the fact that oil exports are now essentially debt repayments rather than income all leave Venezuela at the edge of the precipice.

And it seems it’s no longer a question of it, but when.