How to resolve the Venezuelan debt conundrum, By Uwe Hessler, 2/13/19.
dw.com.
With the US and other
countries throwing their weight behind Juan Guaido as Venezuela's legitimate
leader, time seems up for the Maduro government. But keeping the debt-ridden
country afloat will prove a massive task.
National Assembly leader Juan Guaido, who declared himself Venezuela's interim
president, told the
country's creditors in January that he would seek renegotiation of the nation's
mounting foreign debt if he were recognized as Venezuela's rightful head
of state. Immediately after his announcement, Venezuela's sovereign bonds
gained amid speculation that the Latin American nation's myriad of
creditors would finally get their money back.
Boasting what is believed
to be the world's biggest oil reserves as well as underground reserves of gold,
iron ore and other resources, Venezuela could easily obtain financing and cut a
deal with its creditors, the 35-year-old Guaido said.
"With a new
government, the debt will not only be repaid, but we could refinance with the
trust of a government that can pay," Guaido announced.
Venezuela's outstanding
debt is estimated to be around $140 billion (€123.7 billion) at the
end of 2018. A major problem for the petrostate is that it owes so much
money to so many different parties.
More than $65 billion is
due to international bondholders, while China and Russia have outstanding
claims of $40 billion under their respective loan-for-oil deals. Moreover,
there are companies that have been granted arbitration awards, like Canadian
mining company Crystallex and oil giant ConocoPhillips. And finally, unpaid
suppliers have claims, too.
Bondholders - International debt
investors are already closing in on the government in Caracas demanding in
January more than $9 billion in overdue bond payments. The urgency
increased after ConocoPhillips and Crystallex managed to wring $1 billion out
of the government by threatening to lay claim to Venezuela's assets abroad.
Until then, the government
of President Nicolas Maduro favored servicing debt borrowed from Russia and
China, which is unsurprising given that the two countries are among the few
supporting the authoritarian
ruler.
Large holders of
Venezuelan bonds, including Fidelity, Pimco, BlackRock, AllianceBernstein, T.
Rowe Price and Goldman Sachs Asset Management have been left hanging. But there
seems to be a willingness on the part of Guaido to repay when the time
comes.
On February 4, Venezuela's
envoy to Washington, Carlos Vecchio, said that a successor government
would honor debts that were "legal" and "financial," but
left unresolved the question of whether it would honor loan-for-oil deals.
So if Guaido wrests
control of the government, there won't be widespread defaults. But nobody is
going to get paid immediately, and many bond traders believe that untangling
Venezuelan debt will become the biggest mess in the sovereign debt space
ever.
Cash-for-oil deals - China now finds itself in
a very different position than it would have imagined a decade ago when
its oil-backed loans to Venezuela seemed like an efficient path to securing
supplies while also quietly building a political foothold in
America's backyard.
Now, lenders from the
Asian powerhouse, including the China Development Bank, have been forewarned
that their $50 billion in loans — about $20 billion of which are currently
outstanding — could be on a precarious foundation. Already in 2016, Beijing
granted the Maduro government a grace period until 2018, in which Caracas only
had to pay interest so that it could redirect funds to shore up its collapsing
economy.
Venezuela's massive oil
resources would, theoretically, offer ample support for the loans. But China
may be coming to realize that oil is not formally collateral for the debt, but
rather a means of generating cash for repayment. If a new government
viewed China's oil-backed loans as an illegal
impediment to selling a significant portion of Venezuela's oil, China would
face a predicament.
"They're worried the
opposition will come in and not necessarily want to honor their contracts, or
find loopholes," Russ Dallen, a specialist for Venezuelan bonds at Caracas
Capital Markets, said in a note to investors recently.
Other analysts, however,
believe that a new government will honor Venezuela's debt to Beijing, because
failing to repay China would erode Guaido's credibility.
Kathryn Rooney Vera, chief
investment strategist at Bulltick Capital Markets, says that any loan default
would hurt him. "It would also hurt their future capacity to issue debt in
terms of their credit. So I don't think that's going to happen."
Gabriel
Collins from the US-based Baker Institute for Public Policy and cofounder of
the China SignPost analysis portal, thinks that the upcoming restructuring,
including possibly a debt haircut, is a classic example of Chinese
"geo-economics gone wrong."
"The
sting will offer a painful reminder of the risks inherent in lending to
unstable sovereigns lacking the rule of law," he wrote in a recent
analysis.
Moscow's
pawn - While
Guaido has signaled he wants to honor Venezuela's obligations to
China, he has made no such overtures to Russia. Moscow is considered
crucial to Maduro's survival and
has repeatedly come to his and his predecessor's rescue, handing Venezuela at
least $17 billion in loans and credit lines since 2006.
If Russian President
Vladimir Putin gave another financial lifeline or even continued to buy gold at a
discounted rate, the situation could become a protracted crisis.
Helima
Croft, global head of commodity strategy at RBC Capital Markets, says the
question now is whether Putin believes "a couple of billion dollars more
will preserve a type of regime that remains loosely or closely aligned to
Moscow."
"Not
only are they getting oil, but they've also gained access to pretty good
acreage in Venezuela," said Croft.
Ironically,
if Moscow lets Venezuela default on its debts, then Russia would actually be
able to exercise its lien on Venezuela's most valuable asset: US-based oil
giant Citgo.
In
2016, Maduro secured a fresh loan by giving Russian oil giant Rosneft a
49.9-percent stake in Citgo as collateral. In addition, the remaining 50.1
percent — held by Venezuela's state-owned
oil company PDVSA —
are also collateralized under a bond issue owned by Russia.
"It
would not be unusual for the Russians to try and exercise the lien, just
because it would be very disruptive and chaotic to the United States,"
said Dallen of Caracas Capital.
At
the end of January, however, matters became more complicated for
Moscow after Washington imposed
sanctions on PDSVA's oil exports to the US. Moscow described the ban as illegal, with Deputy Finance
Minister Sergei Storchak saying he now expects problems for Maduro.
"Everything
now depends on the army, on the soldiers and how faithful they will be to their
duty and oath. It is difficult, impossible to give a different
assessment," he told reporters.
But
if the Russians want to get their money back, they should remember their own
situation when they defaulted on $40 billion of old Soviet-era loans in 2000.
Back then, Putin and Russia's creditors agreed to restructure the bonds, and
three years later the oil-rich nation's debt was back to investment
grade.
Norb
Leahy, Dunwoody GA Tea Party Leader
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