The Event


Following this week’s total rout in the oil market, the question of when Venezuela is likely to experience a “credit event” is now been asked in terms of months, not years.

Slumping crude prices have investors bracing for a messy default in Venezuela, where the sovereign and state-owned oil company PDVSA have some US$10bn in external debt payments due this year.

With crude hovering around US$28 per barrel, Venezuela – which on Wednesday reportedly requested an emergency OPEC meeting – could have trouble satisfying its obligations

Barclays said the country will have difficulty avoiding a credit event in 2016 – and that is based on the bank’s forecast of US$37 oil, almost $10 higher than current prices.

The Street seems to feel The Event can probably be averted next month, when $2.228 bn worth of VENZ payments come due. The much more likely freakout date? October 16th, when much of the rest of the year’s PDVSA debt comes due.

Again, the mind staggers a bit to consider the potential for chaotic feedback loops between the Political Clock and the Economic Clock around that time. By October, Venezuela is likely already in outright hyperinflation or something that looks very much like it, and the opposition is likely finished collecting signatures for a recall referendum, which CNE is likely to try to delay as long as possible.

Now, if you’re CNE and looking for a date to hold that referendum…are you really likely to overlook the fact that October 16th is a Sunday?


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  1. “the street” ought to brace for a default. Venezuela has people dying from lack of medicines, in 60 days people will be starving. If the government pays those bonds they will be beyond crazy.

    • The racket ends when that happens, presumably. Chavizmo’s primary goal for existence is bleeding Venezuela dry in the name of improving the lives of the select few revolutionaries. Unless Venezuela implodes before October 16th, they’ll pay the money to the best of their ability.

      • Why presume an end to revolutionary nation building? Those imperialists who hold the bonds had it coming. Let them cry and go buy Burundi bonds to spice their mutual funds. The government can’t borrow anyway, so it ought to default and offer them a free marine haircut.

        These are tough times. The priorities are diluent, food, medicine. If the regime had brains it would cancel giveaways, tell the 30 thousand Cubans in Venezuela to leave, and start moving the gold to London. But before they do that they may wait until the people start putting PSUV oligarchs in pots and eating them. Or viceversa.

  2. Es difícil, por no decir imposible, escribir sobre la situación en Venezuela cuando todo es tan volátil. Ahora mismo la única fuente de recursos del gobierno es la imprenta o las expropiaciones de lo que quede por expropiar pero Maduro ya ha dicho que él es feliz, libre y que mejor discutir antes que tomar decisiones. Mientras tanto en la calle no se ve otro movimiento que el de la gente poniéndose a la cola y la AN sigue sin dar la cara ni proponer nada en materia económica. Esto es lo que podríamos llamar Venezuela at its best. Si esto no deja perplejo a quien lo vea, no sé que otra cosa puede hacerlo.

    • Tengo entendido que la AN tiene entre las madidas que va a presentar proyectos para echar atraás las expropiaciones, devolver la autonomía del BCV y básicamente desmantelar todo lo que hizo el chavizmo en esa materia; no es que no hayan propuesto nada ni que “no tienen plan”

      De hecho, lo primero que deberían hacer es tirar a la basura el bodrio ese de decreto para que maburro tenga control absoluto de la economía porque hasta los interiores se los van a expropiar a la gente.

      • es cierto, esas son las intenciones generales de la AN pero de momento no hay querido concretar nada. El ajuste económico que necesita el país puede llegar a ser brutal y asusta a cualquier político (yo al menos lo estaría si fuese uno de ellos) pero tomando decisiones (o no) por miedo dificilmente saldrá el país adelante.

  3. I still see a lot of denial about Venezuela’s actual situation. The debates taking place in the AN, and even in this blog, to me don’t show the sense of urgency merited. I tend to agree with Fernando, but I think they will make the bond payments in February. Intellectually, I think Venezuelans understand the possibility of famine, but emotionally, they don’t believe it will really happen.

    Also, I see Venezuela on the cusp of some sort of collapse and political change, leading to a reconstruction era, but there has been little thought or debate about exactly what sort of country people want Venezuela to become. Because there is no clear vision for a better future, the country is hesitant to take the first step towards getting there.

    • Si “el corazón tiene razones que el cerebro no comprende”, el cerebro sentimientos que el corazón no siente. No sé donde paran ahora mismo el cerebro y el corazón de los venezolanos pero mientras no se junten los dos en una misma tarea todo pinta realmente mal para el país.

    • “but there has been little thought or debate about exactly what sort of country people want Venezuela to become”

      I might be wrong, but all I read from the Venezulan opposition points to some sort of Chavista social-democracy; in other words, to give some democratic colors to Chavismo, with more inclusive/independent institutions. And that will be it. They still sound very suspicious of private companies/markets, very fond of unsustainable wellfare and that’s makes a “Macri miracle” very unlikely there.

      Why the hell is the Venezuelan opposition against people selling their properties given by the government, for example? What is the economic/political reason behind that?

      • “Why the hell is the Venezuelan opposition against people selling their properties given by the government, for example? What is the economic/political reason behind that?”

        Given the corruption present in the allotment process, resale restrictions should in theory make it less attractive to real estate speculators.

        • But can’t the government set a minimum amount of years, say, 10 years, before the owner can sell his property? That’s a common solution for the problem you mentioned.

        • Because they were given? The people that got them aren’t supposed to need them to live in because they lived in ranchos o arrimados? If they do not need the houses, return them.

          • Just because there’s an “original sin” (government money being used to provide habittation), that shouldn’t entitle the government to have full control of the fate of these families for generations anead. Those people might need to rent their properties, or even sell them at some point, and use the money to move to another place for multiple reasons, just like all of us might.

            It’s like giving money to a beggar and getting mad that he is not spending the way you think is “adequate”, and then asking him to return you the money, How authoritarian is that? To give him a polite and unpretentious advice is enough.

      • Not really relevant to the wonderland of Venezuela, but what do other countries do?

        In the US, no one is ever given a property or house by the government. State or local govts may build apartments and then provide subsidized rent to poor people but no one is ‘given’ any apartment or house. Those convicted of certain crimes are evicted, people whose financial situation are supposed to leave (in theory, anyway), etc.

        • The downside of not giving property certificates is that the dwellers don’t think that they really own the place. And that becomes apparent when brand-new housing projects soon start lacking maintenance, grafitti becomes the new coat of paint on the walls, and crime increases as a result of the decay and abandon. Not to mention how an authoritharian government (not speaking about the US) can use the lack of property titles to threaten families with imminent eviction: “Go to our march next week, or deal with the consequences.” Those things made me believe that an installment plan is better than subsidized rents. A property certificate will not only protect families from governmental abuse, but also change the families attitude toward their own homes and neighbourhood.

  4. Sigh… Alright.. See you then in Oct 16th Torito. When you will most likely be proven wrong (again). I stopped the times you have been wrong now…I thought it was supposed to be in 2015? But now it’s not Feb 2016 but Oct 2016 when the inevitable will happen. See, that way you are always right! When we get to Oct 2016, then it will be in 2017, etc. etc.

    Some useful reading on the matter:

    In all honesty, I don’t really understand why people seem to think that the we have a debt problem. Sure, go ahead and default, we have a $10bn. problem…Everything else in the country is fine and surely saving $10bn. at the expense of all the legal battles and problems that will follow is definitely worth it. I can probably think of 5-10 problems which are way more important than debt.

    • Pablo Venturino, a founding partner of White-Bridge Capital, cynically points to Frederick Hayek in trying to describe the ‘financial suicide’ PDVSA would endure were they to default. He then points to Argentina’s 12 year destructive experience of their default decision as proof of his argument, completely ignoring the similarly insane economics of the Kirchner’s. “See what happens? Look at Argentina’s experience as proof.” The argument being that ya gotta keep making those bond interest payments, or else. What Mr. Venturino ignores is the politics in the equation (Kirchner’s and Chavista’s), and the human destruction taking place because of the politics. People are suffering. Standing in lines for hours on end for basic necessities. Basic medical care has collapsed. Do any of those standing in line comprehend how the country got into this mess? Do any of them understand why 27 billion dollars in interest payments was made over the past 16 months? Real money, not for food, but for interest payments? With no discernible purpose? Its not like as a result of the Chavista’s consistent payments, new loans will be forthcoming. They won’t It’s over. Game’s up. This is a catastrophe, not a chapter in a financial textbook. Mr. Venturino doesn’t seem to understand that.

      • Dr. Faustus, the financial obligations of a nation go beyond politics. And if the opposition came up with a credible plan to restructure, then the market will understand, lower borrowing costs, etc. What creditors like to look at are credible plans, a rationale for doing things, among others. Unfortunately, I’m afraid that the opposition members (given some of their previous declarations) are as ignorant as some of their govt. counterparts when it comes to financial matters. That the money the Govt. raised was squandered? Well, that is not the problem of debt holders as they will still chase the Govt. and the country with all the legal resources they can employ to get repaid. Yes, they were getting exposure to risk when lending money, etc. but that will not stop them from using legal resources at their disposal. Venezuelans chose the govt. that was in power (and still today ~5mm voted for them meaning they seem to be fine with the status quo i.e. lines, scarcity, etc.) so they are partially responsible for the mess too. You can’t break up the concept of nation when it comes to matters such at debt. And if I remember well, I recall quite a few students making improper use of CADIVI scholarships, people using credit cards in an incorrect way, millions of dollars that were siphoned out in this way too, so not just Chavista crooks and goons that stole money and use dollars inappropriately. Various people have written about this before (see one of Juan Nagel’s first Sobremesa posts in this blog).

        And this happened when RECADI too. So what is the excuse of the country? Oh, we are sorry? No one forced the country to take on the debt. Pay up. Don’t pay and face the consequences. It is THAT simple.

      • I read the article and I don’t see the cynicism. In my opinion the author is exposing his experience in Argentina (I’m also from Arg) where shortages of food supplies and cash were the standard after the default. I think the author is highlighting that a default would not be a way out for Venezuela (it wasn’t for us either) and that a negotiated alternative is always better than a default. In particular, in a country with a clear liquidity problem but a decent debt to gdp ratio.

    • It is accountability time!!!!

      Mr. Toro are you still on the lookout for October’s default or? October 16th is finally approaching…Of course you can always do as you have done before (haven’t you done so already in a recent post?) and roll over your forecast to 2017 and then in 2018 to 2019. You know that is what most pundits do.. Unfortunately for you, you picked the wrong securities to do that. I would say that not investing in something that doubled in price from Feb’16 to Sep’16 (PDVSA 5.25% 2017) was just a terrible investment recommendation.

  5. The country is already in technical default, as companies in Venezuela and abroad are not getting paid by the government, for example, the case of Uruguay. The only effective solution (although it does not guarantee an instant improvement of the economic situation) is for the Armed Force to remove the president and the cabinet, call for a political transition (triunvirate?), and for presidential elections within the next 8 months. The default can be avoided by going to the IMF, something this regime will never do. I doubt China will keep lending, unless it asks something the nation should not give.
    I deal with this issue in my blog today:

  6. Funny that Barclays’ traders are aggressively selling CDS (default protection) on VENZ this morning after the report 🙂

    I agree on the fundamental picture, but I’m not comfortable taking advice from Barclays. Shouldn’t be normal for Research and Trading desks to be that uncomfortably close and so contradictory on their actions.

  7. Price of commodities, oil in this case show cyclical behaviors.

    It is argued that the price of oil will shoot up again, probably with a vengeance, once markets correct themselves and demand surpasses supply, (economics 101), or even faster upon a black swan event such as regional wars, etc.

    The bet chavismo is playing is to ride the storm and be able to survive long enough to get lucky and catch the next upswing. If this is allowed to happen, Venezuela will be doomed for good.

    The current crisis, is the opportunity for nationalistic players to learn the hard lessons of uber populism and clientelism, and build a better productive, more mature citizen and society.

    I would recommend the new AN on the political establishment to use every opportunity to explain why we have ended up like we have after 15 yrs of super bonanza. This as they try to mitigate the upcoming famine, and political and social explosions… NOT to be sucked in as fools to be blamed by the regime as culprits of the coming events.

    The Ley de emergencia Financiera in review is a booby trap: Damned if they approve it, dammed if they don’t.

  8. Most of the debt service due this year ( some 10.8 billion $) is payable by Pdvsa not by the Republic , so its conceivable that Pdvsa might defaul while the Republic doesnt . It was mentioned in a past blog that the two entities are legally considered different debtors and that there is no cross default clause linking the defaut of one entity to that t of the other. Several articles have appeared (quite a few from Reuters) doing the numbers of what it costs to produce Venezuelas oil and how much its getting from its sale now and there is a shortfall which cannot be bridged even if prices rise by 10$. per bl .

    Instead of stating things why doesnt someone do the numbers and check whether default is avoidabe and how !! The numbers Ive seen and calculated tell me Pdvsa ‘s default is (barring a miracle) unstoppable!!

    If default happens what then ?? can any one visualize what will happen specifically ??

    • Perhaps someone with more legal expertise can enlighten us better, but my understanding is that the legal firewall erected between PDVSA’s and Venezuela’s sovereign debt was long since demolished.

      • Roy if my memory serves me there was a meeting some months called by some NY law firm to discuss the possibility of a Venezuelan default , they mentioned that trespassing the wall that separates the financial liabitiy of Pdvsa and the Republic would be a daunting and difficult thing , this was the same message given to us in a blog appearing on this same CC site also some months ago. Not that for other legal purposes the wall would be unbreachable but that it would take some doing , specially where the matter to involve saddling the Republic or Pdvsa with liabiliy for paying the debts of the other.

        It might be a moot point because the Republic depends for most of its revenue on Pdvsa and if the latter falls into default affectng its capacity to provide the Republic with its customary oil income then there is some likelyhood of the Republic falling into default itself some time later.

  9. When individuals and corporations are broke, they sell off assets and reduce expenditures. In a rational world, Venezuela COULD:

    – Start auctioning off businesses and properties it has expropriated over the years.
    – Trim all the excess PDVSA payroll involved in non-core business related activities.
    – List goes on…

    Of course, Venezuela is not “rational”.

  10. Pdvsa may want to keep on paying their debt but to do so they have to have the money , if they dont have the money then defaulting is not the result of an act of choice but an imposition of circumsntances and conditions over which they have lost control.

    There are many signs that Pdvsa is running out of the money it needs to pay its operating costs , pay its taxes , and at the same time pay both its commercial and financial creditors . For example having to ask its faja associates to put up the money to buy the diluent needed to convert the faja crude into saleable product ….

    Could the government forego the collection of taxes to allow Pdvsa to pay its creditors ?? it might but at the price of risking a social explosion (because basic neccesities have all to be imported using available forex recieved by Pdvsa) , the situation may become one where the govt is no longer in control of its decisions because the pressure of outside circumstances cause it to run Pdvsa’s finances down.

    Default will likely not happen because of a deliberate decision by the powers that be , but because they lose control over their capacity to continue making enough money to avoid default !!

    The real question becomes one of what happens once default ocurrs , the answer may appear easy , but its really becames a very difficult one because of the peculiar characteritics of Venezuelas situation and oil industry . One which the govt intrnational lawyers and financiers must be exploring in detail at this very moment .!! Creditors wont find it so easy to recover their loans , they cant seize Pdvsa venezuelan assets , they cant seize its exports ( which belong to the purchaser) , seizing citgo wont bring much money , they can probably attempt to seize its collectibles , but then again it depends on the laws and conditions in the country where they are paid ( China for example) .

    Ultimately there will be a negotiation , a hair cut , a plan of payments matching Pdvsa’s new revenue making capacity , some extra financing to help Pdvsa puts its house in order ….it will be painful both for the creditors and the borrower. But its been done before ….and can be done again !!.

    Oh …..plumb forgot …it will have political consequences.!!


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