The debt situation is coming to a head in Venezuela. The Venezuelan economy has been in shambles for years, plumbing new depths when it seems that things cannot get any worse. All the while the Venezuelan government prioritized debt payments, even as people go hungry in the streets.
But Caracas is running out of time and money. On Thursday, President Nicolas Maduro went on state TV and said that he would seek a restructuring of Venezuela’s debt. But he sowed some confusion by using different words for what he was seeking. As Bloomberg reported on Friday, he switched between “refinancing,” a more benign form of negotiation with bondholders, and a “restructuring,” a more technical term that tends to be associated with a default and stiffing creditors.
Venezuela and PDVSA owed a $1.1 billion payment on November 2, and Maduro promised to meet that obligation. However, he said it would be the last time it paid creditors in full, and moving forward Venezuela wanted some sort of debt relief. "But after this payment, starting today, I decree a refinancing and a restructuring of the external debt," Maduro said on TV. Again, the implications of this are unclear.
“Even if nothing is triggered, this is pushing things to the extreme,” a large bondholder told the FT on Wednesday. “It speaks to how precarious the situation is.”
The problem for Venezuela is that U.S. sanctions could make a restructuring very difficult. The Trump administration has barred U.S. financial institutions from engaging in this kind of transaction with Venezuela or PDVSA. They are also prohibited from purchasing Venezuelan bonds, making new debt virtually impossible for Venezuela. It’s “going to be ugly for holders,” Ray Zucaro, the chief investment officer at RVX Asset Management, told Bloomberg in an interview. RVX holds PDVSA debt. “There’s no real way to sugar coat.”
Related: New U.S. Sanctions Threaten Russian Oil Projects
Moreover, the fact that Venezuela seems to have coughed up the $1.1 billion for Thursday’s debt payment is evidence that Caracas is very concerned about exposing PDVSA to asset seizures from creditors. Paying off bondholders when there is almost no cash left in the country and people are starving is crazy, but not paying also carries risk.
As Bloomberg notes, Venezuela has overseas refining assets, as well as Citgo, the U.S.-based subsidiary of PDVSA. Some of these assets could come under scrutiny if creditors are not paid, and at some point, buyers of Venezuelan crude could start to go elsewhere, or demand hefty discounts. All of that endangers the one source of revenue keeping Venezuela from complete collapse. That is probably why Maduro promised to meet the most recent debt payment while also calling for negotiations on future obligations.
But there is most likely no way out, at least in the long run. According to Capital Economics, Venezuela and its entities owe a combined $65 billion in bonds…and it has less than $10 billion in foreign exchange to work with, much of which is in non-liquid assets. It’s hard to see how the maths could ever work out in Caracas’ favor. According to the credit default swap market, investors put the odds of a Venezuelan default within the next five years at 97 percent.
With debt payments still looming and almost no cash left, it may not take that long. Another $1.6 billion is due before the end of the year, plus a further $9 billion due in 2018. The next immediate hurdle is a smaller $81 million payment – one that was originally due on October 12, but has a 30-day grace period. Related: Trump’s China Trip To Reap Billions In Energy Deals
No matter how you slice it, this is a dark situation that will probably only get worse. The humanitarian disaster is far from over.
For the oil markets, the implications are pretty significant. Venezuela has already lost an estimated 20,000 bpd each month for the past year, according to Reuters estimates. And in September, Venezuela’s output plunged by more than 50,000 bpd compared to a month earlier. Production could fall by an additional 240,000 bpd in 2018, a decline made worse by U.S. sanctions.
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But that isn’t even the worst-case scenario. A default could set off a scramble to seize Venezuela’s overseas assets. That could lead to much steeper production declines. One OPEC source told Reuters that they see a potential for production declines on the order of 300,000 to 600,000 bpd next year.
By Nick Cunningham of Oilprice.com
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