Venezuela: Default, now what?

Date first published: 23/11/2017

Key sectors: all

Key risks: sovereign/sub-sovereign default; sanctions; political instability

Venezuela and state-owned oil company PDVSA have officially defaulted on their debts. On 16 November the International Swaps and Derivatives Association (ISDA) ruled that both were in default following delays on servicing debt, which constituted a ‘credit event’ that will trigger credit-default swaps (CDS). Rating agencies S&P and Fitch had downgraded the sovereign and embattled PDVSA to ‘selective default’ two days prior to the ruling. The moves come as no surprise. Speculation on when Venezuela would default had been going on for years. The processes that the potential cascade of upcoming defaults, and refinancing and restructuring attempts are most likely to last many more. On 2 November President Nicolas Maduro announced plans to restructure and refinance all of Venezuela’s foreign debt, opening Pandora’s box. The complexity of such attempt will be compounded by US sanctions, likely lawsuits and a deepening political crisis, all of which guarantee a protracted, difficult period of financial limbo.

As of 23 November Venezuela has overdue coupon payments on bonds due in 2019, 2024, 2025 and 2026, all of which have been downgraded to ‘D’ by S&P. A default on bonds due in 2023 and 2028 is almost inevitable. Uncertainty over the payments –the government has stated that it had made the 2019 and 2024 delayed payments – and over the restructuring process are expected to increase. The 13 November meeting organised by the Venezuelan government in Caracas to supposedly discuss restructuring plans with creditors holding around US$63bln in bonds only added to the confusion, as no proposal or indication of the government’s plan was made. The meeting was led by Vice President Tareck El Aissami, who is himself under US sanctions. Sanctions will become a key issue in any upcoming negotiations, both with creditors and the opposition. US financial sanctions are expected to make any debt restructuring almost impossible, unless the debt is authorised by the opposition-led National Assembly, which Maduro has rendered obsolete following the creation of the pro-government National Constituent Assembly.

Should Maduro move forward with plans to restructure Venezuela’s estimated US$150bln in foreign debt, the opposition might have an opportunity to increase its leverage ahead of the scheduled 2018 presidential elections. On 1 and 2 December the government and the opposition are scheduled to meet in the Dominican Republic to try, once again, to restore dialogue efforts to try to find a negotiated solution to the ongoing political crisis. Previous attempts have failed and this one may as well. However, sanctions and default are also on the table now, with Maduro recently stated that one of his conditions for the dialogue to move forward is for the opposition to urge the US to lift its sanctions.

Despite US sanctions, and EU arms embargo and unprecedented financial pressure, Maduro still counts with strong allies that remain ready to help: Russia and China. While on 15 November Moscow and Caracas agreed to restructure US$3.15bln in bilateral debt owed to Russia, China has stated it remains confident Venezuela can successfully handle its debt. The Russian agreement does not include PDVSA’s debts to Rosneft, which amount to at least US$6bln. However, such an agreement may be forthcoming and could see Rosneft take-over assets in Venezuela and potentially shipping and refining capability as well as stakes in PDVSA’s US subsidiary Citgo, although the latter would likely be challenged by the US. A complicated, geostrategic, protracted and uncertain financial hurdle has just begun.