How long can Venezuela avoid default?
South America’s insolvent left-wing champion has been the star of sovereign-bond markets
How long can Venezuela continue to make good on its obligations? On one hand, the country appears to be running out of financial wriggle room. Its foreign-currency reserves have dwindled from a high of $43bn in 2008 to just $10bn now, much of it in the form of solid gold ingots. By next year, they are expected to fall to just $2.4bn.
Moreover, the logistics of payment are growing increasingly difficult. As Mr Maduro has pushed the country into overt dictatorship, the United States has responded with sanctions. American entities are banned from doing business with dozens of senior government figures, including the president, vice-president, attorney-general and economy minister. They are also prohibited from dealing in new bond issues by Venezuela and PDVSA. Both measures appear to have spooked compliance officers in international banks, the more cautious of whom are advising against all dealings with Venezuela.
Nonetheless, if Venezuela had to live within its domestic means, it would have gone bust already. The recent recovery in oil prices, which now exceed $50 a barrel, could delay the government’s day of reckoning. And if Venezuela does fall behind on payments, its creditors may prove surprisingly flexible. Seeking redress from a Venezuelan default would be extraordinarily complicated. The complex ownership structure of PDVSA, a sprawling conglomerate, is likely to cause long legal battles over which assets belong to which entities. And because PDVSA has become indistinguishable from the Venezuelan state, even small holders of its bonds—which lack “collective-action clauses” that prevent individual creditors from holding the majority to ransom—might be able to press cross-claims against the government.
In Argentina’s case, litigious bondholders managed to block Argentina’s payments on its restructured debt nine years after those bonds were issued. With that experience fresh in mind, many creditors may prefer to cut Venezuela some slack and continue to collect what they can.
Even if bondholders do play tough, Venezuela’s allies could come to its rescue. According to Monica de Bolle of the Peterson Institute, a think-tank in Washington, both China and Russia “want to string this along”. The cost of maintaining Venezuela’s debt performance is trivial relative to the size of those governments’ budgets. In exchange they both gain a lasting foothold in a country with vast energy reserves, and get to vex Donald Trump by propping up an anti-American regime just 1,300 miles from the mainland United States.
That geopolitical equation might change if Mr Maduro were toppled. But bets on his ousting have so far proven just as fruitless as bets on default. His constituent assembly may draft a new constitution that will secure him in power. And the opposition, a fragile coalition of parties united only in their determination to defeat him, began to fracture visibly last month, following a rout in elections for state governorships (which appear to have been partly rigged by the government). Two of its best-known leaders, Henry Ramos Allup and Henrique Capriles, exchanged insults during consecutive press conferences.
Mr Zucaro predicts that the opposition’s “cannibalistic” tendency will keep Mr Maduro in office, and that investments in the black sheep of sovereign-debt markets will continue to pay off. He declares: “I don’t think the party is over yet.”
https://www.economist.com/news/amer...has-been-star-sovereign-bond-markets-how-long
