You’ve heard it a dozen times by now. Members of the National Assembly keep repeating it. Hell, this blog does too: the government needs approval from the National Assembly to incur in any type of debt.

The government can kick and scream all it wants, but foreign creditors know the score: the regime’s debt deals that are being struck without Assembly approval, from the Fintech repo and all those PDVSA credit transactions, are wide open to legal challenge if the regime falls. I mean, article 312 of the Constitution is pretty clear, right?

The Assembly is already warning honchos in Wall Street not to borrow Venezuela any more money or else. It’s become holy word in the opposition’s political sphere.

It’s strictly politics: bluster from players who know they’re holding a weak hand and are trying to do the best they can with it.

The only problem is, if you have any kind of legal training, you can quickly spot big problems with this argument.

Article 312 in Detail

Let’s take a look at article 312 of the Constitution. At all of it, I mean:

“The law will set the limit of public indebtedness in accordance with a prudent level in relation with the size of the economy, reproductive investment and the capacity to generate income to cover public debt service. Public credit transactions will require, for its validity, a special law authorizing them, except the cases established by framework law (leyes orgánicas). The special law will indicate the types of transactions and will authorize the corresponding budgetary credits in the respective budget law. The annual special indebtedness law will be submitted to the National Assembly jointly with the Budget Law. The State will not recognize any other obligations than those incurred by legitimate bodies of the National Power, pursuant to the law.”

The highlighted bit is the bit that always gets left out of opposition talking points. There are explicit exceptions to Article 312’s principle that all debt must be authorized by law.

Article 150 is an obscure and hardly ever-cited constitutional provision that has been carried over in our constitutions again and again since the 19th century

Constitutions are usually declarations of principles from which it’s hard to extract definitive guidance to help you solve particular cases. That’s why there are laws and regulations. In Venezuela, most dispositions governing public credit are contained in the Ley Orgánica de la Administración Financiera del Sector Público (the Framework Law on the Financial Administration of the Public Sector). Title III of the Law establishes the procedures for public credit transactions, all the approvals and the procedures that must be followed when the Republic directly enters into public credit transactions.

Now, let’s take a look at article 101 of the Law:

“Title III…

…..Article 101. The following are exempted from this Title:

  1. The Venezuelan Central Bank El Banco Central de Venezuela.
  2. The Banco de Desarrollo Económico y Social de Venezuela (BANDES).
  3. State-owned corporations dedicated to financial and insurance intermediation, governed by the Banking Sector Institutions Law and those governed by the Insurance and Reinsurance Companies Law.
  4. The corporations created or to be created pursuant to the Organic Hydrocarbons Law or those created or to be created pursuant to article 10 of the Decree N° 580 dated November 26. 1974, by which it was reserved to the State the industry of the production of the iron mineral…”

In other words, Article 101 fleshes out the exception established in the constitution’s article 312. Entities excluded from the authorization requirement include BCV, companies created under the Hydrocarbons Law, BANDES, public banks, public insurance companies and iron and steel companies. None of these entities need authorization from the Assembly to incur debt. And their credit transactions don’t need to be included in the annual indebtedness law (ley paraguas).

But you are probably thinking now that this article was rammed through the unconstitutional enabling law of 2015? It wasn’t, it has existed even before chavismo was a thing.

Find any PDVSA or BCV financing deal that was approved as a public interest contract by the National Assembly at any point between 1830 and 2017.

Neither PDVSA nor Banco Central have ever requested or gotten authorization from the National Assembly to incur debt. Try to look up any approval from the Assembly for the issuance of Venny bonds, you won’t find them, they don’t exist because they’ve never been required.

My guess is that this exception was carved out to protect what was seen as technically sound, smooth-functioning institutions during the cuarta from political meddling by Congress in their operations.

Article 150 is no Better

The Assembly also cites article 150 of the Constitution to say that because these contracts amount to public interest contracts, the financings need AN approval:

“Article 150. The entering into of national public interest contracts will require the approval of the National Assembly in the cases determined by law.

No municipal, state, or national public interest contract can be entered into with States or foreign official entities or with companies not domiciled in Venezuela, not being assigned to them without the approval of the National Assembly.

The law may require in public interest contracts certain conditions of nationality, domicile or any other kind, or require special guarantees.”

Article 150 is an obscure and hardly ever-cited constitutional provision that has been carried over in our constitutions again and again since the 19th century, even though there’s little case law developing it. I don’t mean to get into a legal history lesson, but I challenge you to find any PDVSA or BCV financing deal that was approved as a public interest contract by the National Assembly at any point between 1830 and 2017. You won’t find them either.

The Correa Gambit

OK, so maybe under Venezuelan law it was all legal in some narrow, technical sense. It still shouldn’t count. After all, it was contracted by a dictatorial government, the very definition of “odious debt” any new government is entitled to disregard, right?

Well, odious debt is a dubious legal theory that originated during the peace negotiations after the Spanish-American War which is not recognized under international law. It has been used recently by lefties such as Rafael Correa as an argument to get out of paying foreign debt contracted by previous governments.  

Do you really think the wisest thing we can do know is try to ñángara our way out of the mess chavismo left by quoting non-sense from freaking Rafael Correa before the foreign court that hears any dispute about the financings? This is just not what a serious government trying to solve the external debt mess left by irresponsible populist does.

Neither PDVSA nor Banco Central have ever requested or gotten authorization from the National Assembly to incur debt.

Look, I understand where the Assembly is coming from and I commend them for doing all they can to make life hell for the government. But it’s strictly politics: bluster from players who know they’re holding a weak hand and are trying to do the best they can with it.  

The truth is that Venezuela right now is a devastated economy that produces almost nothing and spends a big portion of the cash it receives on servicing debts that never should have been taken on. The solution to this is assistance from multilateral institutions and attracting foreign investment by protecting property rights, economic liberties and reestablishing the rule of law. This will be carried out by a serious, market-friendly, well-advised, technically-sound new government that knows better than to misread the Constitution or to rely on flimsy legal theories to weasel out of paying our debts.  

28 COMMENTS

  1. Does this mean that the Supreme Tribunal’s rulings 155 and 156, which have arguably triggered the beginning of Maduro’s end, weren’t even needed?

    • No, because yo do need AN authorization for joint ventures as per the Hydrocarbons Law. However, after the rulling no JVs has been incorporated. That’s interesting

  2. Now, I am trading on slippery turf as an American lawyer attempting to interpret Venezuelan law including your Constitution but I offer the following. It would make sense that there are 2 classes of debt. Debt backed by the full faith and credit of Venezuela and debt guaranted only by a semi autonomous agency, like your nationalized oil company. Only debt approved by your National Assembly is guaranteed by the state. The other debt is only guaranteed by the assets and earnings of the agency who incuured the obligation. Anyone else want to take a stab at this? So who owns the oil, the nation of Venezuela or your national oil company? I would be surprised if your national oil company is empowered to convey all or a substantial part of your oil patrimony to a foreign entity or state without approval of the National Assembly. But, I could be wrong?

    • Oil is owned by the state in Venezuela. PDVSA can issue debt (issue bonds, taking credit facilities) without approval which has been the case so far.

  3. Well-done. Nit: beginning paragraph 3, “lend” Venezuela any more money, instead of “borrow”. As usual, the Venezuelan Constitution is an arroz con mango, so far as interpretation. Agreed, and to get a massive IMF bridge loan, all Venny debt incurred will probably al postre be recognized.

  4. A public interest contract may include financial contracts which by reason of their national importance require the approval of the NA , not just for being financial but because the scale magnitude and repercusions of their terms impact the national interest……the very fact that these are not precisely defined terms means that they can be interpreted so that they fall under the national interest provision. International Financiers are very wary of anything that is fuzzy and not 100% clear in the legal protection of their interests. This is true of many financial institutions from countries which are supposed to be sympathetic to the regime ….the Chinese for example are extremely sensitive to legal risks….even if there is an argument to be made in trying to minimize them.

    Do note the provision which submits all financial arrangements with offshore govts or govt entities and with companies not domiciled in Venezuela to the approval of the NA , this provision knocks off the exceptions referred to elsewhere in this constitutional text.

    The exception in art 101 does no exclude financial transactions by the national govt or its directly administered bodies only by those companies or public entities specifically mentioned in its wording, for example funding for Pequiven is subject to AN prior approval because Pequiven is not a direct subsidiary of Pdvsa. So even if Pdvsa is exempt some other companies working in the oil business are not.

    Just the fact that there is room for arguing or interpreting that some financial arrangements are invalid under Venezuelan law gives the jitters to the mass of international financiers because they know that in law nothing is certain if it can be interpreted by someone with a different opinion (it happens all the time)

  5. Re your Correa example: In 2009, Ecuador repudiated some bonds on the grounds that they were illegally contracted and managed to buy back ***91% of them at 35% face value***. The legalese might have been weak, but it was a massive financial success. The economist called it “Ecuador’s winning strategy”. That Argentina Fd it up doesn’t mean that partial debt repudiation is a bad idea ex ante. I wouldn’t be so quick to dismiss it.

    http://www.economist.com/node/13854456

    • Why do that when a large portion of the outstanding debt already trades between 40-65%? Just buy back little by little and take advantage of liability management exercises.

    • But how do you frame debt repudiation while trying to be the responsible government that’s going to bring back foreign investment? How do you get access to international credit by defaulting on valid debt? The opposition’s agenda couldn’t be more different than Correas, he could afford to be a ñángara, we can’t.

      • Oh my Claudio…But you just brought up the most valid and rational point that I always bring up here: that there is no upside in defaulting under any scenario. There just isn’t, nor for the government, nor for the opposition that could potentially take power. It is a structural issue and there is little Govt. or opposition can do to run away from it, especially when the majority of the income comes from dollar-denominated revenues generated by selling oil in the international markets. Moreover, nothing will be fixed by defaulting because the country doesn’t have a solvency problem but a liquidity one (which is, by the way, perfectly manageable). Defaulting on valid debt and diverting the money to hand out subsidised food and medicine is not a sustainable business, its a populist fantasy being sold by the opposition because it suits their political agenda (so after 17 years more populism, let’s double down on populism!). It’s basic, subsidies don’t produce money.

        What the opposition should be doing is giving comfort to creditors that regardless of what happens in the political spectrum, debts will be respected and measures will be implemented to attract foreign capital once again. That will then incentivise people to bring back the money, which will balance the F/X rate, etc. and in the medium term, allow people to afford things by paying in local currency earned via wages. It’s not rocket science. In addition to that, if they do well, yields would decline and therefore the country would be able to rollover the debt (as the majority of countries in the world do)…But instead, we have the guy who used to be the male version of Judge Judy writing letters to banks about debt repudiation (sigh)…Way to give some comfort…Picture the scenario of all the CITGO collateral being seized by creditors, oil shipments abroad, etc…How are they going to get all that back when they are eventually in power? Once it’s gone, it’s gone…

  6. Where does this leave the debt that is owed to companies for maintaining the oil wells and facilities?
    From what I understand some US companies are owed Billions and have mostly ceased operations in Venezuela.
    Would this still be considered debt that the government is responsible for as the PDVSA did not need NA approval and incurred these debts as normal operating costs.
    The debts as far as I know are still unpaid and the companies that have remained in Venezuela have only skeleton crews left in the country. Halliburton and Schlumberger are two that come to mind that are each owed over US $1 Billion.
    Restoring oil production or at least halting the production decline will require these companies to return and cooperate with management and government entities.
    Most likely a payment plan will be required to get them to return.

    • John, this debt will go unpaid. Private co’s do business in BRV at their own risk. We had a US Supreme Court ruling last week in Venezuela’s favor.

    • Commercial debt is harina de otro costal, we are already in default of that one and it’s not governed by the Ley Orgánica de la Administración Financiera del Sector Público

  7. Superb. Absolutely no comments about it…Not many people have picked up on this because they are caught in the political back and forth, but as you mentioned, neither PDVSA nor Banco Central have ever requested or gotten authorization from the National Assembly to incur debt. This has been mentioned by a few local analysts (which I know have highlighted the point to people like Julio Borges to then be dismissed) and rarely gets mentioned because it doesn’t follow the opposition political agenda.

    With regard to the “odious debt” Mickey Mouse/La La land argument: there aren’t any international laws that supersede NY laws (which govern the majority of the PDVSA debt) with regard to odious debt….As the author rightly mentioned, it is a dubious concept. Good luck trying to get a NY judge to throw NY law out the window when considering this matter.

  8. There is in Venezuelan law no notion such as exists in UK US law that precedent practice limits the capacity for future judicial consideration of such practices as un lawful , moreover the Supreme Tribunal may decide to totally change past decisions on a subject by simply adopting a different approach , there is nothing which cant be changed by modifying past interpretations of a legal issue . It also happens in the US system of Justice but with greater reluctance on the part of the justices….!!

    If an argument can be made then there is always the risk that a judge will accept it where before it was not considered , the nuances of legal interpretation are limitless …..so to place absolute value on past practice is really not very prudent.

    The writt of NY judges does not necessarily extend to all countries in the world , judges in other jurisdiction may have different views and disallow the enforcement of a NY Judges decision in their jurisdiction…., this is old hat and lots of people know it even though one may tend to believe what best advances ones own interests. Venezuelan creditors include a huge array of different companies from different places ,not just the venny holders. They also have the capacity to ask for measures that secure their unpaid debt.

    One bee in my bonnet is whether it is possible for a US judge to declare Pdvsa;s bankrupt or otherwise insolvent at the request of some of its many unpaid international creditors and what would be the consequences of that ?? The creditor wouldnt have to be an unpaid bondholder but just one of Pdvsas many commercial creditors ……….perhaps someone will write on the subject on some future date or …surprise surprise even act on it …..!!

  9. Bill, I am only referring to the bonds. The bonds are under NY law, period. If someone wants to dispute those, they need to do so under a NY court. You will need to look into the law governing the unpaid commercial creditors (most likely to be local law) to see whether there is any way that they can argue for payment in courts other than Venezuelan courts…

    • To the extent the decisions of US judges have to be enforced outside the US they have to go through the judges of other jurisdictions , who may have a different view as to the enforceability of those decisions in their own territory ……, A US Judge may have a hard time getting its decisions enforced in China or Russia or in Venezuela or in other countries …..Those decisions of course may be challenged in other countries where they have to be applied , it will be a lawyers feast , lasting many years ……!!

      Of course different Venezuelan govt entities and Pdvsa have many creditors , not just commercial creditors or financial creditors each with their own claims and arguments , some will shout fraud , precedence ……things people now cant imagine……!! Lawyers can be bold and ruthless and cunning creatures ……we all will learn that in due time…..!!

      But hey what happens if Pdvsa is declared bankrupt by a US court …….is that possible ?? how do you bankrupt a company the core of whose assets are in Venezuela ?? just thinking out loud!!

      • It can happen Bill, but for which reasons? For that to happen they would need to have an incentive (i.e. the co stops paying holders of NY law bonds). Then all the US assets (which are not many) would be attached, bank accounts would be frozen (as was the case some years ago when a court ordered the freeze of some of the accounts due to the Exxon lawsuit, although the freeze was lifted and I believe Venezuela moved the accounts to Switz therafter)…In that scenario, good luck to PDVSA/Venz trying to export oil…They could pull it off but it will make the process very cumbersome and subject to future attachment of oil revenues…Also, it will make all the existing commercial relationships very difficult…It will complicate things more as opposed to simplifying them..

        • Dont disagree that some transactions may become cumbersome , others wont be much affected, take account of the fact that the oil itself is normally sold from the ‘venezuelan port of delivery’ so that it belongs to the buyers not to Pdvsa when it leaves Venezuelan shores making it quite difficult to seize , also that payments can be routed through banks which exists in locations where decisions of NY banks are very difficult to implement , like china and russia …nowadays the only western country recieving export payments is Portugal. Also Oil could be delivered as payment to loans made previously through safe countries …..!! If Pdvsa wanted to play hard ball with the creditors the options are there……!! In the end some kind of agreement will be reached but not before the creditors get a hair cut , my guess is that it would be a BIG hair cut …..because I dont buy it that the big very heavy oil reserves deserve that much consideration given todays circumstances….!!

          As to why anyone would attempt to bring Pdvsa to bankrupcy , well you dont need too much imagination …maybe to extort the payment of some money they are owed and that otherwise will never get paid …also one thing Ive learned is that human love of mischief is endless….., but then again maybe Im wrong .its just that people are so tame in imagining possibilities …..!!

          • As a creditor and looking at what happened in Argentina, I am willing to sit and hold out for 20 years if necessary (years on which interest will still accrue).

            I understand all the things that can be done to reroute payments, that oil is sold at the port of delivery, etc…But look at the Russians, no one can deny that they were and currently are still affected by the embargo and the prohibitions imposed on their financial flows…A similar thing would happen to Venezuela. Or again, look at Argentina and tell me that they were not affected.

  10. Great legal argument! If we move to the realm of the applicability of the law and we take your exceptions one by one, I don’t think it matters a great deal, though. Neither the public banking system- BCV included – nor public export sector companies – iron and oil – need to ask for the assembly’s approval to issue debt. However, with ever shrinking foreign reserves (the public banking sector collateral) there is so much the BCV can do. On the PDVSA side, if they get over indebted, they will certainly have their assets seized – and that would be consequential. So in theory they might be able to get short term loans at prohibitive interest rates, but in practice they would not cover the needs of the Venezuelan economy right now and would most certainly result (if issued massively by PDVSA) in a dramatic default.

    It is true that the argument should be, “the government cannot issue debt at a satisfactory level to kickstart the Venezuelan economy, even if it can still incur in some debt”. In practice the argument according to which the government needs the national assembly to radically transform the local economy still holds.

  11. ISTM that the AN needs to take the next step – passing legislation (over Maduro’s veto, with the MUD supermajority) that voids the authority of chavista officials to contract debt under these alternate mechanisms. Surely the AN has the power to amend the charters of BCV, BANDES, PdVSA, etc.? To remove officers of said agencies?

    And there must be some kind of oversight of state-owned enterprises which ultimately goes to the AN. So the AN can remove officers of such enterprises, or amend the laws under which the state operates such enterprises, and do so.

    If the AN does that, then ISTM that no further debts can be lawfully contracted by the Venezuelan state or by chavista managers of any of its subsidiariies,

    • The only way forward in the short term for a new Venezuelan government, in my opinion, will be for direct assistance from the IMF.
      The influence that major financial institutions have within the IMF will most likely require some sort of settlement or payment plan with the bond holders.
      I doubt that government debt and the debt of the subsidiaries will interest the IMF.
      Nothing will happen before a new stable political entity is in place.
      Maduro is shut out of the global credit markets. That is what made his decisions to pay bonds instead of importing food and medicine so foolish. Paying the bonds in order to maintain access for future bond sales would have been understandable. The inability of Venezuela to borrow was well known before he cleaned out the treasury.
      I do wonder how many of the people in government have bought Venezuelan debt at a huge discount when the uncertainty of default was priced in. They then could collect the interest payment and sell the bond at a substantial profit, Rinse and repeat.
      I would like to see the US Congress approve a substantial aid package for Venezuela. Ideally it would include immediate humanitarian aid, financial assistance and long term loan guarantees.
      The caveat would be that it becomes accessible to a new Venezuelan government, after free and fair elections. With the exception of immediate aid to promote stability.
      This would be a great incentive for the people that oppose the dictator. Knowing that immediate assistance will be available as soon as Maduro falls as well as a boost to get the economy stable and growing, would be exactly what the people so desperately need.
      The OAS could put together a package of aid pledges from the member countries also.
      Everything would be conditional on a new government.

  12. So, are the third parties who are attempting to encourage negotiations between the Chavistas and MUD offering up some program for restructuring Venezuelan debt as an incentive. Are the Chavistas paying the bonds to the detriment of Venezuelans to force an international bail out?

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