Probably the most startling moment from that AS/COA panel regarding Venezuela’s dance with the D-word came from the guy who was, by the longest of shots, most bullish on PDVSA paying its debts this year. The stylish Diego Ferro – who speaks for Greylock Capital, a vulture fund no less – said it loud and clear: “the willingness to pay that, they [Maduro & Co.] have shown, is just surreal, suicidal, crazy, you can define it how you want.”

Normal countries default and restructure long before they reach the extremes of economic chaos we’re plumbing. But radical anti-imperialist Venezuela continues to pay Wall Street like clockwork. What gives?

Why is Venezuela bleeding itself for Wall Street?

The argument for continuing to pay is rather simple: if PDVSA can’t afford to make its next big round of payments (some $4Bn in principal and interest due in the fourth quarter of 2016), all hell will break loose. A disorderly default would follow, courtesy of bonds that are awkward to renegotiate because they have no Collective Action Clauses (CACs).

That would mean something like an Argentine scenario: vulture funds circling over the nation’s finances; PDVSA asset seizures all around the world; and locked international credit markets, not only for the oil behemoth and the Sovereign, but most likely for every single company in Venezuela. But it would be worse than Argentina, because PDVSA has many more assets abroad for creditors to seize than Argentina ever did, and Venezuela as a country wouldn’t last six months with PDVSA locked out of international financial flows, let alone 15 years, like Argentina just did.

That Venezuela can’t begin to consider a PDVSA default makes last month’s repayment of VENZ 16s all the more confusing.

Some market participants reflected on this in early February: in the grand scheme of things, a sovereign default is likely much less traumatic than a PDVSA default. So why would Maduro be willing to pay a sovereign bond that does have a Collective Action Clause, scraping the country’s gold pot as hard as ever when the country is already in a humanitarian crisis and according to some, facing a Balance of Payments crisis and requiring IMF help, when that effort would only deplete the assets it needs to pay the bonds that really matter, the PDVSA 16/17n double whammy?

Taking ‘creative financing’ to a whole new level

Well, turns out Maduro had an ace (or perhaps a full poker?) under his sleeve. Like a deadbeat forced to pawn the family’s last set of bedsheets to pay his debts, the Government has been scrambling for money in some unlikely places. Starting the settlement of old ICSID arbitration disputes arising from the ¡Exprópiese! era.

Last week, Venezuela cut a multi-billion dollar deal with maletín-based mining company Gold Reserve that magically turned an imminent liability into a short-term liquidity boost. BCV’s Merentes put forward a half-baked explanation of the arrangement: Miraflores is looking to ask Wall Street for a $5Bn loan backed by future gold sales, kind of like we did with oil to the Chinese. In effect, we re-pawned a mine whose de-pawning had gotten us sued in the first place, and turned a past-due bill into a payday. Neat!

Nelson also hinted that the government is going to pursue cutting imports at Greece-style austerity rates, reducing them by 40% for the second year in a row. It’s very hard to envision the extent of such a draconian measure, yet the social outcome is quickly showing our society’s ugliest face. It may be that Pérez Abad calculates that, post default, you’d be forced into still deeper import cuts, because if PDVSA can’t transact the country can’t transact. That may even be right, as far as it goes. Still, try to explain these subtleties to the pueblo arrecho.

Oil Czar Eulogio Del Pino reiterated that PDVSA is seeking to re-profile its short-term bonds, even going as far as using the word “restructuring”. It was a somewhat alarming choice of words, given that that’s one of the definitions of a Credit Event, according to ISDA, the referee of the credit derivatives markets. Hope they have some good lawyers on that – not that I need to worry, this government may not have the money to import immunoglobulin for Zika patients, but they’re never stingy when it comes to their New York lawyers.

And to sum up the government’s toolkit of money-raising initiatives: a last resort that’s becoming a recurring one. The ever-present possibility of another round of Chinese financing, perhaps accompanied by a relaxation on the terms of the cash-for-oil agreement as some market sources suggest.

Thinking the Unthinkable: What if we don’t default

Is this responsible fiscal management? A million miles from it. The republic is negotiating under extreme duress, and its counterparts know it. None of the deals being cut would withstand even a cursory salvaguarda investigation: the conditions now being accepted in return for emergency financial help would scandalize your local neighborhood loan shark.

In the not-so-long term these chickens will come home to roost: previous and current borrowing binges inevitably come due. If oil prices rise strongly again, maybe we get away with it – sort of. If they don’t, a llorar pa’l valle.

The High Government’s calculus is clear: in the short-run, screwing over foreign creditors is an existential threat. The now everyday calamities like critical food and medicine shortages are the clearest demonstrations of the stomach-churning social costs being paid to keep this show on the road.

Nevertheless, the measures aimed at securing external funding can, and some speculate, will ensure PDVSA stays on track with its financial commitments of 2016 and avoids a credit event. They need to keep the ability to transact, because they need a minimum of cash in their accounts. They know liquidity kills you quick, but solvency it’s just a matter of continuously kicking the can.

BofA’s Francisco Rodriguez broke the Street’s consensus and now expects the state oil company to muddle through its commitments of this year. It wouldn’t be the first time he’s bucked the consensus and been proved right.

Willingness, then, is not going to be a problem. Ability might still be. At current oil prices, the country is facing a $25-30 billion financing shortfall for the year.

That’s a big number. Maybe too big.

Is it bigger than their irresponsibility? We’ll find out.

 

21 COMMENTS

  1. Well, it’s not that groundbreaking. He basically just said that PVDA won’t default in 2016. There’s another $7 billion worth of repayments coming due in 2017. The oil is set to be in the 30-40$/bbl range until 2020-ish, so a complete default will be very hard to avoid.

  2. The consequences of a disorderly default are such that it may be comparatively better for the regime to bite the bullet and assumme as many economic and political sacrifices as are needed to avoid a disorderly default , with a good dollop of luck, a lot of and some fancy well executed plays Default may not be inevitable . One thing we can probably dismiss as impracticable is the notion that the gold reserve deal is going to bring any new money in , gold reserve is a mickey mouse outfit very short on resources and a large debt with not mines in operation , and part of the mine its been offered is the subject of another litigation which is shortly to result in another adverse decision against the regime. The chances of such deal bringing in any money are not very credible .( for a more detailed explanation look for The Devils Excrement not on the subject) , The Rosnef deal to sell them a 40% participation in mixed joint venture , may have more to do with the fact that the Russians are owed several billion dollars which are being paid with the said stock transfer , so again no new money coming in. The amount of assets which can be monetized abroad are no where near the amount which is needed to avert default.

    The one thing that might really help ( aside a not very likely sudden rise in the price of oil) is for Pdvsa to go for some kind of deal with its most important creditors to swap the current bonds for others that are payable at som later time thru a kind of pre default negotiation , that is not totally impossible , and though difficult represents an option which Pdvsa cannot rationally dismiss.

  3. A couple of years ago, I made a suggestion that the Opposition should declare the regime illegitimate and announce to the world that any deals, loans, treaties or other financial obligations made by said regime from the date of the announcement forward would be considered null and void after the current regime had been replaced. The purpose of my suggestion was to limit the regime’s ability to make bad deals, such as they just did with Gold Reserve. I was soundly beaten about the head and shoulders by virtually everyone on CC for suggesting such a drastic measure. Is it time to reconsider this?

    • Your idea is excellent. It is supported by some articles of the Constitution as follows:

      Artículo 150. La celebración de los contratos de interés público nacional requerirá la aprobación de la Asamblea Nacional en los casos que determine la ley.
      No podrá celebrarse contrato alguno de interés público municipal, estadal o nacional, o con Estados o entidades oficiales extranjeras o con sociedades no domiciliadas en Venezuela, ni traspasarse a ellos sin la aprobación de la Asamblea Nacional.
      La ley podrá exigir en los contratos de interés público determinadas condiciones de nacionalidad, domicilio o de otro orden, o requerir especiales garantías.

      Artículo 151. En los contratos de interés público, si no fuere improcedente de acuerdo con la naturaleza de los mismos, se considerará incorporada, aun cuando no estuviere expresa, una cláusula según la cual las dudas y controversias que puedan suscitarse sobre dichos contratos y que no llegaren a ser resueltas amigablemente por las partes contratantes, serán decididas por los tribunales competentes de la República, de conformidad con sus leyes, sin por ningún motivo ni causa puedan dar origen a reclamaciones extranjeras.

      Artículo 187. Corresponde a la Asamblea Nacional:
      9.- Autorizar al Ejecutivo Nacional para celebrar contratos de interés nacional, en los casos establecidos en la ley. Autorizar los contratos de interés público municipal, estadal o nacional con Estados o entidades oficiales extranjeros o con sociedades no domiciliadas en Venezuela.
      12.- Autorizar al Ejecutivo Nacional para enajenar bienes inmuebles de dominio privado de la Nación, con las excepciones que establezca la ley.
      18.- Aprobar por ley los tratados o convenios internacionales que celebre el Ejecutivo nacional, salvo las excepciones consagradas en esta Constitución.

  4. Great article from you, and allow me to add an opinion to your text: was not the same to Trade P-2015 than trading V-2016, and I’m pretty sure will not be the same to trade P-16 and no words for that famous bittersweet P-17s (Ideas of Tittle for your next art.) eaven if they come all in to the same End Of History (PAYED). We can write or talk a lot about what is happening From Inside To Outside Venezuela, but definitely IMHO we just know this 2 things: 1- Wiliness to pay has been probed; 2-If Default occurs will be disorderly (both are mutually excluyent). In conclusion this is a simple WE DONT KNOW so far but we have some clues. Someones will be right and others will be wrong as always, but here in Vzla. everybody have kind of a MisterPopo inside and want to be the king of the hill saying to much when we know so less about what is really happening inside, and what I like for your art is that “We’ll find out”.

  5. Del Pino understands what a disaster it will be if PDVSA defaults, the company’s operations will suffer disruptions which will reduce production significantly. Thus, the goal is not to default at any cost. I think they can make it this year as long as Maduro approves the decisions which may be the only reason an “accidental” default occurs.

    At a Conference last week, the consensus was they will try all the tricks. If oil bounces back to the 40’s I think it is doable.

  6. The government has clearly decided if will do whatever it takes to avoid a default. So if they end up defaulting, it will most likely be an “accidental default”. Around late September or early October, after a deal falls through, and realising there’s nothing else to sell or no way to sell at the prices they need, a minister will say “Oh, fuck. We’re not going to make it. We’re still ____ billion short”.

  7. Well, I see one very important reason not to default, at least for chavismo: A number of people who got the bond loans are bolivarists waiting to collect their part of the pinata, remember that for chavizmo having their pockets full is more important that children dying of flu and cancer.

    What will they do for the “pueblo arrecho”? Well, chavizmo will continue wearing their moai mask, claiming “You’re just overreacting, so shut up and take it”.

    The opposition? They have basically a loaded shotgun on their hands, they can basically tell the people “Venezuela is screwed because chavizmo HOARDED ALL THE DOLLARS so the country now can’t afford the basic imports needed to put food on your tables again, nor to provide medicines for your sick children.”

    • IMO, PDVSA 17N offers a better risk/reward, but P16s are the first-in-line, so their chances of being repaid are much higher. Everybody has a different view on the matter and your feedback is welcome. If you happen to be on BBG we can discuss this further

  8. Pdvsa might benefit : New income from the increase in gasoline prices, even if allocated to fund social programs, help Pdvsa finances to the extent that it frees part of the oil export income PDVSA uses to fund the same missions to keep itself going . If additionally they allow Pdvsa to sell part of its export income directly to the DICOM rather than to the BCV (at a higher rate) that will also help its finances (to meet the bolivar part of its costs) . This is of no direct help to the general population which is not getting the imported stuff it needs to cover its ordinary necessities because there will be no additional Forex available to apply to that purpose .

  9. around 20% of the P-16 and P-17 are owned by Venezuelan institutions ( PDVSA , Cantv, BCV, Corpoelec, BDV ) , another 25% are concentrated in 4-5 hedge funds ( PIMCO and others ) .

    PDVSA will swap those bonds ( maybe they will pay P-16 only ) for a new bond or for another one they already own. SOme hedged funds will agree , institutions will agree, some retail will agree so they can move the bulk of the payment ( 50% ) , 3-4 years more, for – lets say – 25% more capital ( 1,25$ for each 1$ ).

Leave a Reply