Venezuela's Inevitable Default

Venezuela is close to defaulting in the midst of its financial crisis. On Monday, the now chaotic country owns $251 million to bondholders. This is happening after the country's attorney general was kicked out and a new legislature took power.



Experts anticipate that Venezuela will make the payment to bondholders. But it has other payments coming due in the near future and could fall short on those if the economy continues to tailspin and the United States hits it with heavy sanctions.

"This model is broken, and default is inevitable," says Siobhan Morden, an expert in Latin American bonds at Nomura Holdings. Oil "sanctions will probably arrive sooner and force default sooner."

Trump has already slapped Venezuela with sanctions and is willing to hit them with more if the political situation continues to deteriorate. I find that the only issue with these sanctions is that they may actually embolden Maduro's base.



Beyond sanctions, Venezuela's economy continues to spiral our of control. The unofficial exchange rate that most Venezuelans use has more than doubled since late July. Inflation is expected to soar 720% this year and and over 2,000% next year, according to the International Monetary Fund.

Venezuela owes about $5 billion to bondholders for the rest of this year, and it has only $10 billion in the bank. It also owes billions more to China, Russia, energy companies and U.S. airlines.

If the US takes extensive measures to harm Venezuela's oil industry, the country will no doubt default much sooner.

What do you monkeys think of this situation? What lies ahead for Venezuela? Will Venezuela's default have any major impact on the US, China, Russia, etc.? Should Trump hit them with stronger sanctions?

 
Best Response

Interesting topic from financial angle (pure tragedy from human perspective). With current oil prices Venny can probably make it through the year ceteris paribus. Key payment is $3-4 bn owed in Oct/Nov from sovereign and state oil company PDVSA (most analysts include this debt as 100% owned by government and PDVSA oil exports are basically only source of $ for the country). In fact, most of the upcoming debt due is PDVSA. Ultimately though default is coming unless oil goes much higher as the proceeds of oil exports are not nearly enough to cover imports and debt service (breakeven oil price is higher). The situation is more dire as due to Chavismo domestic industry has been decimated so there is no competitive non oil export sector and nothing get made locally (hence need for imports). Government has already compressed imports to kept money to service debt as 1. lots of regime insiders hold the debt (30% yields hey!) and they fear their oil exports/foreign assets could be seized if they default (Citgo etc) among other reasons. This is why Venny has been scraping pennies from under the couch so to speak (trying to securitize gold, selling bonds at huge discounts, offering people they have lent money to huge discounts in return for cash).

However, all else is not equal. Venny is essentially a military dictatorship (has like many times the US miliatary's # of generals) who are controlling key sectors of the economy, which they get in return for supporting the "shell" president Maduro. The current government can't win fair elections (hence all their attempts to re-write the constitution) and the population is fed up and turning towards violence. Ultimately, it all comes down to (in my opinion) the military abandoning the regime and negotiating an exit with the opposition. TBD on how quick or bloody this process is (military isn't really on board for the extreme violence necessary to control population- it is the national guard/police/regime militias doing the dirty work). Recent sanctions really don't mean much- key to watch are sanctions on the oil sector, whether financial (TKO), banning imports of Ven oil (10% US supply i think) or exports of US light crude which is necessary to dilute Venny's extra heavy crude. US is in a tough spot as any of these actions means either increase in gas prices (primarily southeast US) or a lot of lost Houston jobs as Venny is ~10% of global revenues for oil service companies.

I don't think this is a catalyst for the next global crisis as it has been well telegraphed, mostly owned by EM funds who are neutral/short (locals are long haha) and with some small distressed participation. Don't see much regional spillover other than refugees for Colombia if it gets ugly.

Stay tuned.

 

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