Milton Friedman once joked that if you put the government in charge of the Sahara Desert in five years there would be a shortage of sand. He could have been talking about Venezuela and its oil wealth. But it is no joke.
On Monday Caracas missed interest payments due on two government bonds and one bond issued by the state-owned oil monopoly known by its Spanish initials PdVSA. Venezuela owed creditors $280 million, which it couldn’t manage even after a 30-day grace period.
Venezuela is broke, which takes some doing. For much of the second half of the 20th century, a gusher of oil exports made dollars abundant in Venezuela and the country imported the finest of everything. There were rough patches in the 1980s and 1990s, but by 2001 Venezuela was the richest country in South America.
Then in 2005 the socialist Hugo Chávez declared that the central bank had “excessive reserves.” He mandated that the executive take the excess from the bank without compensation. Today the central bank has at best $1 billion in reserves.
Falling oil prices are partly to blame, but the main problem is that chavismo has strangled entrepreneurship. Faced with expropriation, hyperinflation, price controls and rampant corruption, human and monetary capital has fled Venezuela.
As of Tuesday evening, the Investment Swaps and Derivatives Association still had not declared Venezuela in default. That matters because this will trigger the insurance obligations inherent in the credit default swaps. But S&P Global Ratings declared the country in default Monday. On Tuesday morning the Luxembourg Stock Exchange issued a suspension notice for the bonds with missed payments.
President Nicolás Maduro has formed a commission to restructure up to $150 billion of the debt and put Vice President Tareck El Aissami —who is under U.S. sanctions for drug trafficking—in charge. Mr. El Aissami called a meeting of creditors on Monday in Caracas, which most bondholders did not attend. Press reports said Mr. El Aissami delivered a monologue on Venezuela’s intention to pay and took no questions. He argued that Trump Administration sanctions make it difficult for the dictatorship to arrange refinancing.
The real problem is that restructuring assumes the country can grow again. That’s nearly impossible without a change in policy that will free the economy.
If Caracas doesn’t find a way to settle with bondholders, they will soon ask authorities to seize Venezuelan assets such as oil shipments at sea and Citgo facilities in the U.S. Such are the wages of socialism.
Wednesday, November 15, 2017
Tuesday, November 14, 2017
The agency is downgrading Venezuela's sovereign debt grade to "selective default".
It means Caracas skipped a specific bond payment but remains committed to paying off its international debts.
And in a further blow to President Nicolas Maduro's debt-ridden socialist government S&P said: "There is a one-in-two chance that Venezuela could default again within the next three months."
The ratings agency said the nation failed to make $200 million in coupon payments within the allowed 30-day grace period for bonds due 2019 and 2024.
S&P said Venezuela could again miss a payment on its outstanding debt obligations or advance a distressed debt exchange operation, equivalent to default, within the next three months.
Venezuelan sovereign debt was mainly a touch firmer but some PDVSA bonds fell further, with the 2035 bond down 1.2 cents, the 2027 bond down 1.4 cents and the 2021 issue down 1.5 cents.
Industry body ISDA said it would reconvene on Tuesday to discuss whether PDVSA had triggered a credit default event through a late payment of its 2017N bonds.
It comes after Venezuela gave creditors chocolates instead of firm proposals in a desperate ploy as the country teeters on the edge of financial collapse.
Yesterday the socialist government offered the sweet treats during a brief meeting in Caracas but left investors without a clear understanding of the government's strategy to renegotiate $60 billion in debt.
President Maduro confused investors this month with a vow to continue paying Venezuela's crippling debt, while also seeking to restructure and refinance it.
Monday's short and confused meeting, attended by senior Venezuelan officials blacklisted by the United States, gave no clarity on how Mr Maduro would carry out his plan, bondholders and their representatives who participated said afterwards.
One bondholder, leaving the meeting that lasted a little over half an hour at the 'White Palace', departing with a colourful gift-bag containing Venezuelan chocolates and coffee, said: "There was no offer, no terms, no strategy, nothing."
Russia, China, Egypt and Bolivia boycotted an informal public United Nations Security Council meeting on Venezuela on Monday organised by the United States, saying the 15-member body should not be involved in the situation.
"The issue is about meddling with the internal domestic affairs of Venezuela," Russian UN Ambassador Vassily Nebenzia told reporters, adding he hoped the country could settle its issues peacefully without any external interference.
US Ambassador to the UN Nikki Haley told the meeting: "The fact that the (Venezuelan) government would go so far as to try and get people not to show up to a meeting is guilt. And that's unfortunate.
"We received pressure from regional partners not to have this meeting. This goal is not to degrade anyone. This is not to humiliate a region. This is only to lift up the region."
Uruguay's Deputy UN Ambassador Luis Bermudez attended the UN meeting, but said his country did not believe the situation in Venezuela was a threat to international peace and security.
Venezuela's UN Ambassador Rafael Dario Ramirez spoke to reporters as the meeting was being held, flanked by Nebenzia, Chinese Deputy UN Ambassador Wu Haitao and Bolivian UN Ambassador Sacha Sergio Llorentty Soliz.
Mr Ramirez said: "The meeting is a hostile and clearly interfering act of the United States that undermines the principle of sovereignty of a member state of the UN. We condemn this act of political manipulation."
Venezuela is suffering from a harsh economic crisis and President Maduro's government has clamped down on the opposition, jailing or otherwise barring from office many dissenting leaders and activists.
Dozens of people have died in violence since the opposition began a sustained wave of protests in April. Met by rubber bullets, water cannon and tear gas fired by the National Guard, the protesters say the crisis demands an early presidential election that they are sure Mr Maduro would lose.
His popularity has been pounded lower by triple-digit inflation and acute food and medicine shortages.
European Union foreign ministers approved economic sanctions, including an arms embargo, on Venezuela on Monday, saying regional elections last month marred by reported irregularities had deepened the country's crisis.
The United States has also imposed targeted sanctions on top Venezuelan officials.
Anxious not to push Caracas any closer to economic and political collapse as debt restructuring talks begin, EU governments held back from targeting any individuals.
The bloc instead left names for a later stage to try to persuade President Maduro to calm the situation.
Spain's Foreign Minister Alfonso Dastis told reporters at a meeting with his counterparts where the sanctions decision was made: "Everything we do is aimed at seeking dialogue between the government and the opposition to find a democratic and peaceful solution."
Venezuelan opposition leaders said last week they would resume efforts to hold a dialogue with President Maduro, even though they say he previously used such talks to stall for time instead of implementing serious reform.
Over the weekend, President Maduro had termed imminent sanctions by the bloc as "stupid."
Monday, October 23, 2017
Venezuelans are screwed but happy,” President Nicolás Maduro chortled this month. State elections last weekend show he was half-right. The economy is in freefall, there are acute shortages of medicine and food, inflation is almost 1,000 per cent and homicide rates have soared.
Before Sunday’s vote the government — steward of this mess — had at best a 30 per cent approval rating. Improbably, though, the ruling socialist party won 17 of 23 governorships up for grabs.
“Fraud” cried the opposition.
“Another victory!” Mr Maduro proclaimed. Whatever the case, the vote’s lasting results will be pernicious: greater polarisation; radicalisation; more international isolation; an even weaker economy; and, as the country’s problems fester, a greater risk of civil war.
There is a still a way out of this mess. Venezuela is not Syria or North Korea. It does not suffer from sectarian violence; nor does it have nuclear arms. Rather, the regime in Caracas is more akin to a group of mafia mobsters that has run out of options. The amounts they have looted are breathtaking: as much as $300bn, according to disaffected former ministers. A negotiated transition, perhaps with selective amnesties, is still possible. Indeed, although distasteful, it is the only real and lasting option for the country. The question is how best to get there?
The politics are the hardest part. The regime has dug in. It has cynically used past mediation efforts — led, among others, by the Vatican — to pretend to talk. One problem is that, although the country’s situation is dire, it is not yet catastrophic for Mr Maduro and his cronies. Presently, their incentive to negotiate is low. This needs to change.
To this end, targeted sanctions by Washington have frozen the US assets of corrupt officials. This has pressured regime members without harming the broader populace. Latin America has also begun to do its bit. In August, 12 of the region’s biggest countries, including Brazil and Mexico, said they would not recognise the all-powerful constituent assembly installed by Mr Maduro, nor any of its laws.
Now the EU needs to follow suit. The aim should be a package of sanctions that is conditional on the country holding free, fair and internationally monitored presidential elections in 2018. That is what the constitution stipulates. Disclosure by banks of financial information on public officials who have stashed stolen funds abroad would be a good place to start. For one, it would expose the sham of “Bolivarian socialism” and undercut government support.
The economics of a transition would be only slightly less complex. Encouragingly, the International Monetary Fund has begun to ponder this eventuality, as the Financial Times revealed this week. Venezuela’s external financing needs will probably amount to upwards of $30bn a year. Such a large programme would test the IMF’s funding rules, as in Greece and Ukraine. It would require a write-off of an estimated $140bn of foreign debt. Adding to the complexity will be Russia and China, both major Venezuelan creditors, IMF shareholders and sometime Caracas allies. Their role will be crucial.
Of course, the international community is not going to provide large sums of money unless it is accompanied by a fresh government with broad consensus on required economic policies. That day will come. When it does, Venezuela will be able to borrow from the IMF at 2 per cent, instead of the extortionate 48 per cent lending rate Caracas has used of late. Consumption will rise. Austerity will lift. Venezuelans will no longer be so screwed, and much happier.