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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Is A Venezuelan Default Inevitable?

Bondholders, creditors, and any company with operations in Venezuela are all agog for news from Caracas after President Nicolas Maduro announced Venezuela will look to restructure its US$89 billion worth of debt to be able to continue servicing it.

Forecasts about what will happen next are all pessimistic, and that’s no wonder. By the end of next year, the government and state-owned PDVSA must repay debt obligations to the tune of US$13 billion, and foreign currency reserves are less than that already, at US$10 billion. What’s more, the country is subject to economic sanctions from the United States, which prohibit any U.S. entities from taking part in any business dealings with Venezuela, including debt restructuring.

It is these sanctions that many analysts view as the main reason for an unavoidable default. As Bloomberg author Katia Porzecanski wrote in a recent overview of the Venezuela situation, lack of access to U.S.-based banks and investment companies will make the debt restructuring initiative very difficult if not impossible, as debt restructuring almost invariably involves new debt issuance.

Some observers believe a default might be the lesser evil for Venezuela: imports are at multi-year lows and the population is suffering from shortages in basic goods including food and medicine. The government could stop servicing its debt and use what money remains in the state coffers to tackle the shortages.

A default, however, is in nobody’s favor, which makes the situation extremely complicated. Bondholders are just fine with payments coming in, even if they are late, as the bonds carry a quite attractive coupon. What they are not fine with is the possibility of a default followed by fights about the order of repayment of the various debts.

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Another thing bondholders and creditors are not fine with are statements from opposition leaders that if there’s a regime change in Caracas, they will stop servicing certain debts—debts that include a PDVSA bond purchased by Goldman Sachs, which, the opposition claims, covertly supported the Maduro government. The bank could suffer a paper loss of several million dollars on this bond if Venezuela defaults.

The Venezuelan government is certainly not fine with a default regardless of the arguments for it, which boil down to boosting much needed imports. If Caracas defaults, it will lose a lot of internationally located assets, most of them related to the oil industry, which supplies almost all of Venezuela’s export revenue.

Citgo will have to go. Refineries and oil cargoes, too. Some analysts, like Katia Porzecanski, even argue that if Venezuela defaults and creditors get their hands on its oil assets, buyers of its oil will start looking for other suppliers. Others, such as FT’s John Paul Rathbone, note that even if it stops servicing its debt, Venezuela will not gain anything, as any savings would be offset from lower oil revenues following the seizure of foreign oil assets.

It seems the corner is very tight for Venezuela. It has a strong backing from Russia and China, but it’s doubtful how ready these two would be to take on a lot of new debt as part of its restructuring. There aren’t a lot of options for Venezuela, but it seems bent on continuing with its debt payments whatever the cost.

By Irina Slav for Oilprice.com

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  • RefMan on November 06 2017 said:
    Of course Venezuelan default is inevitable, the only question is how long Maduro can keep juggling all the different debts. I thought 2017 would be the year they failed, but now I think it will be 2018

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