Sovereign Debt | Venezuela Defiant In Face Of Bond Default

Venezuela’s external debt is variously estimated between $120 billion and $143 billion, including as much as $63 billion of foreign bonds.

A restructuring is looming over Venezuela’s external debt. Lawyers have already called it potentially the most complex ever. In fact, a partial default has already actually taken place.

In November, the rating agency Standard & Poor’s declared that the embattled oil state was in default after it missed a payment on a $200 million coupon. The announcement was followed by a default determination from the International Swaps and Derivatives Association. But a defiant president Nicolás Maduro repeated that a restructuring will take place without default, and earlier in the month state-owned oil company PDVSA paid the amortization of a $1.1 billion 2017 bond as pledged.

Venezuela’s external debt is variously estimated between $120 billion and $143 billion, including as much as $63 billion of foreign bonds. Gross domestic product contracted more than 16% in 2016 and is forecast to decline by a further 12% in 2017. Food and medicines are scarce, and the population is struggling. There is little doubt that the country will have difficulties in dealing with future payments.

A first meeting with creditors in November ended in less than an hour, as officials did not offer any detail on their intentions. In a September paper aimed at presenting the main issues, Mark Walker, head of sovereign advisory at financial consultancy Millstein and Co., and Richard Cooper of the law firm Cleary Gottlieb Steen & Hamilton, wrote that the country and PDVSA “face what may be the most complex and challenging sovereign-debt restructuring to date.”

Bond investors reacted calmly, with analysts betting on the political need for Maduro to hold the fort as long as possible. “They are paying, but with delay due to the [economic] sanctions posed by [US president Donald] Trump,” says Jan Dehn, head of research at Ashmore Investment Management. Maduro has the political clout to suppress imports and the ability to keep financial ties with key partners such as China and Russia, Dehn says. “We will trade until the next principal repayment, which is in August 2018. If the spread stays at 4,000 [basis points] until then, you make more than 33% in US dollars in that time period.”