Bloomberg News recently came out with this article titled “Venezuela Refuses to Default. Few People Seem to Understand Why”.
The question is fair:
Why does a country that’s so starved for cash keep honoring its foreign debts? In other words, how does it justify shelling out precious hard currency to wealthy bondholders in New York when it can’t pay for basic food and medicine imports desperately needed by millions of impoverished citizens?
As Ricardo Hausmann noted, this moral choice is odd, to say the least. And it’s even odder when you think that the guys that paid over $36 billion to Wall Street in the last 20 months are the self-proclaimed socialists that run the country.
According to Bloomberg, few people understand the government’s choices. But working as economist in the fixed income market, I think that’s simply not true.
Despite the apparent oddity, the reason for paying debt above anything else, as explained by market players across the spectrum–Hedge Funds, most Swiss/European Private Banks, Dealers, and local investors, and several of the guys on Daniel’s tenedores categories–is clear:
The government conceptualizes default as a long-term “game over”
The main arguments go as follows, and partly related to the theories mentioned in the Bloomberg piece:
- Venny/PDVSA officials deem the overseas assets seizure risk as too high to consider voluntary default.
- High-ranked government officials (Maduristas or not) see themselves in power for several years more, and the risk of losing access to international capital markets in the long-term is a ni de vaina kind of choice.
Let’s dig las patas en el barro to explain each argument.
First, you can argue like Francesca Odell did in the Bloomberg article that PDVSA’s “structured sales contracts makes it difficult for them to be interrupted by a legal challenge”. In criollo and more detail, that means that PDVSA’s oil sales are designed so that the oil shipment is property of the buyer as soon as it reaches the ship in Venezuelan ports.
By design, bondholders will have a tough time seizing oil shipments in case of a default. What they will actually be able to seize the ship, provided it’s PDVSA’s property. But, if that is true, why is the self-proclaimed socialist government still paying Wall Street?
Well, because the lawyers paid by Wall St. (especially “vulture-like” hedge funds) are already preparing like sharks smelling blood for the day the government decides to cut its veins. And PDVSA has a lot more of strategic overseas assets than just ships. I’ve talked to these lawyers and the government most certainly has as well. They’re scary.
Second, government boliburgueses think they cannot afford to lose access to international capital markets in the long run, which will reopen if oil prices recover in time. They want every potential source of dollars available for 2019 because they think they will stay in power.
Just imagine what Maduro imagines (supuesto negado):
After avoiding a Recall Referendum in 2016, and with oil prices above $65 p/b for most of 2017, 2018 and 2019, a voluntary default in 2016 could tear down my chances of financing a populist binge before the next presidential elections. Chinese loans will not be enough.
I think in the end, the government’s willingness to pay is driven by this end-game. That’s why if we see a default in Venny/PDVSA, it will probably be an ability to pay issue, not a willingness to pay problem.
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