Meanwhile, In The Failed State Of Venezuela...

from Forbes

The Socialists United of Venezuela and its president Nicolas Maduro continue to run this once relatively prosperous South American oil nation into the ground. People are still starving. Hospitals are short staffed. People of means have moved to Madrid or Miami. People of no means are hightailing it to Colombia and Brazil. If this unfolding disaster were taking place in Washington., one would probably blame the Russians. But this is Caracas, so it must be the CIAs fault.

At this point, the country of Venezuela is being held together with duct tape and God's will.

Oil production is still dismal at best, collapsing at worse. Wall Street bond lords have been waiting for at least a year now for the economy to get so bad, that PSUV leaders kick Maduro to the curve. But so what? If they did, who would lead? Surely there is scant evidence that the party of Hugo Chavez can save Venezueal from itself.

The latest cabinet reshuffle was just noise as Maduro simply realigned his power base to insulate himself against a palace coup from within the ranks. Oil prices are higher than they have been in years, but Venezuela keeps getting worse. Its economy is producing quadruple digit inflation. Its central bank is useless against it. The currency, the Bolivar, is utterly worthless. Nobody wants it.

"It’s all about petrodollars and whether there are sufficient (funds) for rental and corruption income to leverage military support," says Sioben Morden, the managing director in charge of monitoring Venezuela's life support systems over at Nomura Securities in Manhattan.

The top tier military still has power at oil firm PdVSA, but it’s going to be increasingly difficult to trickle down funds to the mid-level officers and public workers.

The regime change theory which Morden and other hedge funds holding PdVSA have been wargaming for over a year is dependent on the assumption that Maduro fails when the petrodollars are tapped out. He needs them to keep PdVSA oil workers, the guys with the red hats and the red shirts that can always be counted on to shout, sing, wave Venezuela flags during Maduro rallies citing foreigners for his country's woes.

Investors should no lonnger assume that negative headlines will eventually spell the end of PSUV. They have hunkered down. Didn't you know? Venezuela is basically a dictatorship now.

PdVSA has defaulted on its bonds.

HIV patients are unable to get medication to keep them alive.

People are selling garbage to make ends meet.

This is a shame.

This is all on PSUV.

Latest oil industry data from May reaffirmed the roughly 50,000 barrels per day decline in oil production. PdVSA produced around 1.4 million barrels per day in May.

The Baker Hughes rig count declined to 28 in May. It’s been years of mismanagement and underinvestment, says Morden, but the recent production drops reflect a total lack of maintenance, no spare parts from the import markets, weak refining capacity and technical personnel -- many of whom have fled the coop to Miami-Dade County or Bogota.

Moreover, there are financing constraints on the Venezuelan government by the U.S. Maduro will say that this is why his economy is getting worse. But these sanctions are less than two years old and Venezuela's economy has been in a free fall now for at least three years.

ConocoPhillips' May 13 seizure of PdVSA assets on the tiny island of Curacao may exacerbate the decline for June production now. Argus media is suggesting production of somwhere between 1 and 1.2 million bpd; so another fall in oil.

Meanwhile, the threat of lawsuits from bondholders is still on hold -- lucky for Venezuelans -- as investors assess the prospects for new management and whether recovery value is a function of debt restructuring or either offloading or acquiring equity in offshore assets, be it oil fields, ships, or refineries.

Wall Street bond lords are likely to sue PdVSA if World Bank investment settlement claimants are more aggressive on pursuing Venezuela's offshore oil assets. If this keeps up, Venezuela's crisis would have forced them to do the thing they fear doing the most -- giving the family jewels over to big bad Yankee capitalists. They put themselves in this spot. Their investors did not force them there.

"It’s going to be increasingly difficult for PdVSA to continue to operate under these legal threats," says Morden.

Those threats may be a more serious problem for PSUV's rulers than its declining collection of petrodollars.