The Economist: Venezuela asks its creditors to renegotiate its vast debt

INVESTORS have long seen a default on Venezuelan sovereign debt as a question of when, not if. They have consistently priced its bonds at levels implying that a bankruptcy was imminent, only to be surprised when the cash-strapped oil exporter somehow managed to stay afloat. Now the game at last appears to be up.

On November 2nd Nicolás Maduro, the country’s authoritarian president, announced that he would order a “refinancing and restructuring” of foreign debt worth about $105bn, roughly ten times Venezuela’s foreign-exchange reserves. It would be the second-biggest sovereign default in history; in 2012 Greece restructured $261bn of liabilities. Bonds issued by the government and PDVSA, the state oil company, fell by 25%-40% on the news.

Analysts are scratching their heads as to what Mr Maduro has in mind—or if he has a plan at all. In the same speech in which he declared his intent to refinance the debt, the president also proclaimed that PDVSA would pay its final instalment of $1.2bn on a bond that matured on November 2nd. Just a week earlier, the company also made good on a $842m payment of principal amortisation. If Venezuela were really preparing to renege on its debts, having an extra $2bn in the bank would surely come in handy during contentious negotiations with lenders. “You don’t pay a billion dollars, and then say ‘screw the bondholders’,” says Ray Zucaro of RVX Asset Management, a Florida-based investment firm that holds Venezuelan bonds.

Mr Maduro’s brief, cryptic statement provides little indication of what concrete steps he will take. The closest precedent is the Argentine crash of 2001, when the government in Buenos Aires simply stopped making payments on $82bn of debt. Unlike Argentina, however, Venezuela is a petro-state that holds valuable property abroad, including Citgo, a refiner in the United States, and a fleet of oil tankers. If the country tried to follow in Argentina’s footsteps, foreign creditors might be able to seize those assets. That would severely disrupt PDVSA’s operations, and could cause the Venezuelan economy, which has shrunk by over a third since 2013, to collapse even further.

The president invited banks, bondholders, and “everyone involved in foreign debt” to the country to take part in talks, theoretically scheduled for November 13th. The chances of a consensual workout, however, appear to be nil.

First, it would have to exclude American investors. The United States imposed sanctions on Venezuela in August, after Mr Maduro replaced the opposition-controlled national assembly with a sham parliament he calls a “constituent assembly”. The measures forbid entities under American jurisdiction from owning any new bonds issued by Venezuela or PDVSA. That would prevent them from exchanging existing bonds for new ones in a restructuring deal.

The United States’ Treasury department has also designated Tareck El Aissami, Mr Maduro’s vice-president, as a drug kingpin (Mr Aissami denies the charge). As a result, Americans cannot have any contact with him, which could stop negotiations before they get started since Mr Maduro has named Mr El Aissami the head of his new debt-restructuring committee. Moreover, bondholders from outside the United States would hardly be amenable to a settlement in which the cost of a haircut falls entirely on them, while American creditors are made whole.

Observers who give the president credit for thinking at least one step ahead have floated a number of plausible theories for his perplexing decision to pay today and renegotiate tomorrow. One interpretation is that Mr Maduro may hope to continue paying debts owed by PDVSA, which provides 95% of the country’s foreign income, while welching on those contracted by the Venezuelan state itself. The government’s vulnerable assets abroad are technically held by PDVSA rather than by the Republic of Venezuela. And the government’s bonds, unlike some of PDVSA’s, all include “collective-action clauses”, which prevent individual creditors from blocking a deal that a super-majority of lenders are willing to agree on.

However, foreign courts are likely to look askance at any effort by Mr Maduro to pick and choose which lenders to snub, since PDVSA is widely regarded as being indistinguishable from its owner. Asdrúbal Oliveros, a Venezuelan economist, recently tweeted that a “selective” default is “practically impossible”.

Another theory is that Mr Maduro may have intended to send the prices of his country’s debt tumbling. A sell-off would enable either Venezuela or its foreign patrons, primarily Russia and China, to buy back the obligations cheaply. That, in turn, would allow Venezuela to retire its debt at lower cost, or to put it in the hands of sympathetic allies.

A more conspiratorial explanation has been mooted by Javier Ruíz of “Caracas Chronicles”, an opposition-friendly blog. The government had spooked markets by making use of 30-day grace periods to delay a series of interest payments, causing their prices to fall. Noting high trading volumes in the bond that Mr Maduro said would be paid on November 2nd, Mr Ruíz wondered whether the government might have informed well-connected insiders that it planned to settle up this obligation in full. If true, that would have ensured that friendly cronies made the final stop on the Venezuelan-debt gravy train before payments ceased.

Whatever the explanation, it is clear that Mr Maduro is trying to pin as much of the blame as possible on Donald Trump. He devoted much of his speech to denouncing “the global financial dictatorship of American imperialism”, and complained of a “genuine financial blockade”. The United States has certainly made it harder for Venezuela to fulfil its obligations: several Venezuelan businesses have reported that international banks have rejected or delayed their dollar payments in recent months, at the bidding of compliance departments concerned about falling on the wrong side of American law.

Mr Maduro says that his treasury’s bond payments have been held up for the same reason. In practice, though, America’s sanctions on Venezuela are modest. In contrast with Cuba, the target of a long-standing trade embargo, Venezuela still enjoys open trade with the United States and sells much of its oil to America.

The end of the oil boom in 2014, profligate public spending and systematic corruption have exacerbated Venezuela’s fiscal woes. But ultimately, the reason that a country with more oil reserves than Saudi Arabia is hopelessly insolvent is the destruction of its private sector by Mr Maduro and his predecessor, Hugo Chávez.