Nomura Securities thinks Venezuela is sleepwalking into default:

The current level of imports already produces acute stagflation with any reduction from current levels not politically or socially viable for aggravating the economic crisis. The financing gap is so extreme that it would take a collapse in imports from an estimated $32bn in 2015 to near zero this year. The debate is quickly shifting from a willingness to pay to an inability to pay even under the Maduro Administration, especially as oil prices fail to recover to a minimum breakeven level of $65/barrel […]

We have not seen any coherent approach to policy management that would suggest a thoughtful approach to debt default. Instead, our base case remains an accidental default with cashflow stress that eventually forces non-payment later in the year on the bulkier debt maturities. This then risks a disorderly default with markets referencing the last sovereign default with Argentina trading below 20 on the limited liquidity and one sided selling against the backdrop of an economic and political crisis.

In its note about it Bloomberg prattles on about “accidental default”, inexplicably flubbing the obvious play-on-words – an oversight we’ve corrected in our own headline here.

25 COMMENTS

  1. Worse than willingly defaulting is unwillingly defaulting, at least when you know that viene el coñazo you can flinch or something…

    Then we will have to wait for them to realize it, then make some half assed explanation and maybe someday make something about it…

  2. The government has to act immediately to cut spending.
    Two low hanging fruits that I can think of are the preferential $ and the almost free Gasoline.
    I am wondering about how large is the hemorrhage of money those two items account for.
    Drugs, food are way more important than free gasoline.

    Are they afraid of inflation?
    Dollarize the economy.

    The pitchforks will show up in Miraflores before any action is taken.
    Maduro ousting will come soon after.

      • I think that would be more like 2.4%. Estimates of the economy/GDP vary, but place it around 500 billion, give or take a few. The subsidy is what, 10-15 billion? (I recall the Forbes article about it being $50 billion, but the consensus figures place it as the above) That would place it roughly at the 2-3% range, which is still a significant part.

        As far as adjusting the exchange rate or ridding the gas subsidy, neither will happen if they can possibly help it. One would push the citizens in the street (as it has done previously) and the other will unplug the enchufados from the regime faster than a motorizado purloining an iPhone 6. The government would either have to fall or result to some very nasty tactics to stay in power, and I don’t see them going down without a fight.

  3. “The financing gap is so extreme that it would take a collapse in imports from an estimated $32bn in 2015 to near zero this year.”

    Breathtaking.

    • This, there, is the stuff Amanda was saying on the other article. We are not talking about an “adjustment”. Adjustment is when I stop spending a bit of my salary because I need the money to pay my debts.

      This is when even if you give all you salary, you will not be able to pay for food.

  4. Dios mio. It’s very sad because you cannot understand how so very inneficient asses took control of the country. I wonder if the intergalactico would have hadled the situation likewise. My bet is that he would not, he had something that Maduro does not, the political capital to spend. Viewing the humanitarian crisis to come makes me very sad, and the worst, nobody will help, just look aside while everybody outside sucked into the blood of Venezuela.

    • “..how so very inneficient asses took control of the country.”
      Easy.
      —> The archaic Electoral system is broken.
      It promotes Charisma and Populism rather than competency.
      The sad part is that those who should know better are not even acknowledging this problem.

    • If they can argue that inflation doesn’t exist, I’m sure they can argue that debt doesn’t exist. Debt is a conspiracy devised by the rich in the economic war. I can buy that!

    • I would like to clear up one issue here. The problem is not simply the lack of money or the lack of dollars. It is more largely due to various “controls” which include the exchange rates. There are companies inside Venezuela who have dollars but are prohibited from using them to buy imports. Nobody wants to hold Venezuelan currency, and the regime wants to print money and believe the purchasing power of the money is determined by the exchange rates. What needs to happen is an import/export barter system that allows parties to determine on a case by case basis what Venezuelan producers want to export in exchange for import commodities. This is already being done to a small extent, and I am trying to figure out how it is getting around government channels.

  5. To be remembered is that what we are facing is a Pdvsa default not necessarily a Country Default because most of the money payable this year forms part of Pdvsa debt. In the end there will be a negotiation to reduce and extend the terms of payment which will be brutally painful for the country and yes….also painful for most creditors ….wonder in this scheme of things how the Chinese will fare (I suspect that most of the money owed to China is owed by the Republic but how will they continue to receive their oil payments when Pdvsa defaults I cant guess…).

    This will either cause a regime change or a radical change in the regime , because these negotiations will ultimately require some credible plan to put things back in enough order for the creditors to agree to anything . A tide over loan to start things going again might be needed …..this is the greatest test of our countrys independence it has ever faced.

    It is not in the creditors interest to allow Venezuela to fall into social chaos and political anarchy , so they should have an inducement to collaborate. The fantasy that Pdvsa’s off shore assets can contribute much to pay its debt will be definitely dispelled …..in todays situation they will be very difficult to transform into ready money which can be used to pay off existing debts.

    This is the worst possible time for Pdvsa to default …..and of course for the regime ….people will know for the first time what hardship really means !!

    • In the end there will be a negotiation to reduce and extend the terms of payment which will be brutally painful for the country and yes….also painful for most creditors

      You’d think so, but there’s no Collective Action Clause on PDVSA bonds. There’s no negotiation possible, any holdout investor can stop any negotiation, Argentina-style.

      The only option left would be – gulp – for the government to declare PDVSA bankrupt. Imagine that!

      • Lets try to imagine a default , no more money is paid to the creditors , the creditors seize whatever assets Pdvsa has abroad (not that much money there, specially in these times) and impound whatever collectibles they can on ongoing oil sales (good luck with supplies to China) , Pdvsa stops having money to operate and its production falls to minimum levels , meantime with the dissapearance of imports people start starving and you have constant rioting ….result for creditors , any hope of collecting their money is lost . Also world opinion turns againts them for the havoc they are contributing to cause…..

        Sensible thing for at least most creditors: to negotiate ………some of course will play tough and continue to go for a recovery of all their money, if there are enough of them , a disaster for all…..!! If not they will learn to be patient and come to some accomodation with Pdvsa and or other creditors allowing for negotiations to go forward.

        Lets imagine a Pdvsa default ……..not easy, maybe it can be pulled off …….there is the fact that in Venezuela at least Pdvsa doesnt own the oil , its owned by the Republic and under Venezuelan law the oil and the assets used to exploit it revert to the State directly if the party granted the right to exploit it ceases to do so for whatever reason . Pdvsa is not like other oil companies that have the right to exploit the oil as part of their disposable assets, under the law the right is for the State to grant and take away unilaterally, if it revokes the right (given Pdvsa default) then there isnt that much left that can be seized . The default route is a legal and economic mess but kudos to Francisco for having the imatination to think of it….

        What happens to the reverted rights and assets , the Sate hands it to another state company to use them for the countrys benefit as per the law……oil sales and revenues produced by the new company are not burdened with the debts of the defaulting Pdvsa because legally its a different company…… Not sure its legally doable but then legal experts should be able to determine that …!!

        Oh and by the way most Pdvsa oil sales are done on a CIF basis so that the cargoes themselves belong to the purchaser once the ship transporting it leaves Venezuelan port so they are not subject to seizure by Pdvsa creditors ……

        If default happens lawyers are going to have a ball….

        • Bill….

          What follows is a strange mix of ideas as a reaction to the even stranger theories about how things work.

          To start with, CIF is Cargo, Insurance and Freight… i.e.: It becomes the buyers property once the goods are delivered to the destination port. I.e.: CIF shipments can be seized if PDVSA defaults.

          PDVSA IS a Sociedad Anónima, owned 100% by the State. Therefore PDVSA’s liabilities are ultimately assumed by the State. According to the following link, PDVSA’s registered and paid stock is worth USD 1.28 billion (Using the current black market rate of Bs 1,000 / USD), or some other higher figure if one of the four “official” exchange rates are used.

          http://www.pdvsa.com/index.php?tpl=interface.sp/design/readmenu_bonos.tpl.html&newsid_obj_id=3660&newsid_temas=510

          So let’s imagine the scenario you proposed: PDVSA defaults, declares bankruptcy, State pays a small amount to creditors (What’s a billion of five here and there)…. and then confidence in the Venezuela economy drops even more, with the few still trying to make business here (Including the Chinese government) move their focus elsewhere. You know… it is a big world, with many other places where to make a profit.

          In my imaginary world, Venezuela will instead stop producing Faja crude -which it currently sells at loss-, increase internal fuel prices to at least production cost, and stop giving away subsidized crude (i.e.: PetroCaribe exports plus the gifts/exchanges with Cuba). That would reduce internal expenditures, capital and operating costs in PDVSA, remove 400,000 to 600,000 bl/day of unprofitable oil, increase profits on the rest of exports, and ultimately and in a short period of time provide enough cashflow to meet debt obligations, imports of essential goods (food and medicinal drugs), and leave enough money to keep the party going amongst the politically connected elites… That is what I would do if I was in power and wanted to continue to cling to power no matter what.

          This approach however would not solve any of the long lasting structural issues of the Venezuelan economy, just prolong the current state of affairs.

          For a real fix, a bankruptcy and the slap in everyone’s face that will follow has better chances of changing the country.

          From this perspective, maybe Mr. Maduro is really trying to change the country, making it suffer until it learns how to do things right.

          Mr. Maduro is bankrupting Venezuela to make is suffer and make it learn how to do things correctly.

          Mr. Maduro is a Master of the advance of societies.

  6. They will/shall laumch am exchange offer and extend short term maturities, approx $20 bn, to avoid an outright default. In the case of Venezuela bonds such a reprofile of the debt can be somehow negotiated and impose throug collective action clause, in the case pf PDVSA they will have to offer cash and other economic benefits for those trndering the bonds. I believe the government has a default plan, as it has beem advised for many years by NY law firms, however policy paralisis and improv could bring an unplanned default, i.e run out of cash to the equation. Countries do default: Greece (restructure), Argentina, Ivory Coast (Restrucutre), Ukraine (restructure), ecuador (default)….so it is not uncommon to see a default, the issue it is how it is handled amd dealt with bondholders amd local financial system.

  7. In its note about it Bloomberg prattles on about “accidental default”, inexplicably flubbing the obvious play-on-words – an oversight we’ve corrected in our own headline here.

    I am reminded of how the word “unexpectedly” arises so often in journalism as practiced in the US.

  8. hmmmm…Again, we go back to square 1. Default and things in the country won’t necessarily improve. In fact, they will become much worse. The problem is not debt levels but liquidity. And as the govt. has shown, the willingness to pay has always been there, so they will try to manage liabilities by repurchasing at rock bottom prices, and sort it out. All I keep hearing is the same broken-record figure of the govt. owing $10bn. this year bla bla… What that doesn’t take into account is that a portion of the outstanding bonds have been repurchased, hence $10bn. is not really $10bn. How much is it? No one really knows but it’s definitely not $10bn.

    In addition, still lots of spending to be cut (i.e. gasoline price etc.) so that will be the next step. Investors are sensible so if there is a compelling restructuring proposal that can be executed to avoid default it will probably go through. In my opinion, they should try to structure something linked to recovery of oil price. Default is always the worse option as you will hurt the reputation of the country and when you do need to seek financing going forward, it will be difficult to obtain. This hurts the country as whole regardless of who is in power.

    On a different subject, a point no one seems to tackle is: if the govt. eliminates all the price controls etc, lifts the currency control, etc. what will be the social impact? People complain about queues for not finding anything. However, in practise, what will be the behaviour of the population if say you lift controls and then ,hypothetically, one is able to find all the goods being sought in the supermarket but can’t buy them due to the high price? You will have social unrest almost immediately. Hence, this is why the govt. has decided to keep controls at the expense of lines. This is obviously not a good thing to do and it depends on how much money you have to spare, but the trade off they are making is very simple: rather have little goods, with massive lines that lots of goods at very high price which a lot of people won’t be able to buy. The adjustment will obviously need to come at one point. And a transition might actually take much longer than expected (akin to Perestroika period in the USSR). Don’t see anyone in the opposition able to pull-off a restructuring of this magnitude.

  9. If default happens it wont be because the regime wants Pdvsa to default but because lacking the money it may not be able to prevent it . While there are highly unlikely scenarios where actual default is avoided many are of the opinion that absent some negotiated arrangement with a large enough group of creditors it is well neigh inevitable !!

    Pdvsa has been short of money for a long time , there may not be that much money in its purse to buy ‘soon to mature’ bonds on the cheap , the measures that might help ease the financial situation have not been taken and even if they are taken it will be a while until their effect is felt in any substantive way. We are getting close to the edge where if the measures are too timid or delayed they will not be enough to save the day, Some will contend that we are now long past that edge ) .

    Default is not desirable for any one , not for the regime nor for Venezuelans , the question is can it be avoided given the dire financial situation the regime has dug itself into by bad managment and procrastination …..more and more people are betting that it cannot be avoided…lets hope they are right !!

    If actual default is avoided thru negotiations with the most important creditors , it is bound to bring deep changes in the way the regime handles the countrys financial affairs , its difficult to see them doing this but hey lets be hopeful it happens …..other wise ………the country will fall into the abyss and so will the regime.

    • I would like to clear up one issue here. The problem is not simply the lack of money or the lack of dollars. It is more largely due to various “controls” which include the exchange rates. There are companies inside Venezuela who have dollars but are prohibited from using them to buy imports. Nobody wants to hold Venezuelan currency, and the regime wants to print money and believe the purchasing power of the money is determined by the exchange rates. What needs to happen is an import/export barter system that allows parties to determine on a case by case basis what Venezuelan producers want to export in exchange for import commodities. This is already being done to a small extent, and I am trying to figure out how it is getting around government channels.

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