The Wall Street Journal’s Kejal Vyas and Anatoly Kurmanaev report that Venezuela’s Central Bank struck a financing deal so bad last week it makes PDVSA’s swap and Fintech’s repo look harmless by comparison.

The government raised $865 million cash by selling $2.8 billion in previously untapped PDVSA bonds held by the Central Bank. The central bank got just 31 cents on the dollar for the bonds from Goldman Sachs’s asset management arm.

This is atrocious for Venezuela’s public finances. Just look at the deal’s cash flow:

Let’s be explicit about what the graph means: in return for $865 million now, the government committed to dishing out a total of $3.65 billion through 2022, split between $2.8 billion in principal and $756 million in interest. It’s unbelievable. The government now has to fork up the $865 million three times over by 2022 to make good on the $2.8 billion in bonds —and has to pay a crippling $756 million interest on top of that.

It’s like ripping out the electric wiring from the walls of your own house to sell the copper and get your next crystal meth fix.

The deal has an “internal rate of return” of 48%. That means this is equivalent to taking out a loan at 48% interest… in dollars!

This.

Is. not.

Normal!

It’s like ripping out the electric wiring from the walls of your own house to sell the copper and get your next crystal meth fixBorrowing in these conditions is the kind of self-destructive behavior you might expect from a desperate addict.

To see how unhinged this is, look at what happens when you put in 48% interest as the price of new financing in a debt dynamics simulator:

The debt/GDP ratio balloons. It blows up. And it’s obvious why: when countries borrow at very high interest rates, they’re forced to take out yet more loans to pay the interest on the old loans and debts pile up exponentially, until something breaks… That’s why borrowing at high interest rates is self-defeating. It only worsens the debt problem and impoverishes the country.

This deal is morally bankrupt: finance as collective punishment.

Oil prices haven’t recovered, PDVSA is broke and Maduro’s government is desperate for cash. They need to win a phony election scheduled for the end of July and there are $4 billion in debt payments coming due in October and November. The regime is out of good financing options and even bad financing options, so it’s now choosing between criminally irresponsible alternatives. But it’s not the only one at fault.

Goldman Sachs and its clients played an appalling role here. They knew they were financing Maduro’s criminal regime. They knew Maduro would use the money to buy phony elections, fund a broken economic system or stave default for a few months in the most unsustainable way. They knew their money wasn’t going to finance infrastructure, development or anything remotely benign.

Their deal is morally bankrupt: it’s finance as collective punishment.

Per WSJ’s reporting, Goldman wagers that “a change in government could more than double the value of the debt.” I wouldn’t be so sure: PDVSA’s 6% 2022 bonds were issued and sold to the Central Bank in dubious conditions in 2014. Venezuelans only found out about their existence months later in PDVSA’s debt report. And their sale last week for 31 cents on the dollar was, if not illegal, then egregious and immoral.

Every reasonable economist I’ve talked to agrees that the next government should call a moratorium on debt payments, get international financial assistance and use the funds to raise imports from $17.8 billion to something like $35 billion. That’s the best shot we have of transitioning to market economy, putting the accelerator and growth and wages, and making sure people feel the improvement quickly. From the point of view of economic policy, that much is clear.

But given the PDVSA swap, the Fintech Repo, this 48% debt issue and what’s to come, it may also be politically expedient to pursue a hostile debt restructuring or even repudiate some the debt to free up money for imports and score points at home.

Venezuelans already have good reason to distrust Wall Street. Everyone agrees that most of the money from debt and oil was squandered. Venezuelans know there’s nothing to show for the trillion plus dollars that poured in: no hospitals, no schools, no roads, no food, no future. And Venezuelans connect the dots. They know that the more money they use to repay these causeless debts, the less there’s left over for imports, production, jobs and a decent future.

Consider this: what happens when a new president is in the driver’s seat of a national unity government and blaming Chavismo for everything goes out of fashion? The political class might need new enemies and scapegoats.

Isn’t Wall Street a natural and deserving one?

73 COMMENTS

  1. Chavistas and Goldman Sachs. A partnership based on shared values. Lack of scruples, lack of empathy, lack of conscience.

  2. This is silly. Why do you think that Goldman Sachs did this deal demanding a 48% effective interest rate?

    Goldman isn’t stupid. They already know that Venezuela is going to go bankrupt and repudiate all this ridiculous debt once the Chavistas fall from power. The 48% interest rate is not a real 48% interest rate because Goldman is EXPECTING the Chavistas to fall or not be able to pay it back well before the final bond payment is due.

    You aren’t “sticking it to wall street” by repudiating this debt once the Chavistas fall. You’re just doing what Wall Street expects. If anything you should be thanking the guys at Goldman. Every deal they cut like this only hastens the day which Venezuela’s government totally collapses and the Chavistas can leave. You still have the largest oil reserves on the planet to tap into once they’re gone anyway.

    • If you think for a moment that I’m going to thank vultures picking on the corpse of Venezuela… I very much doubt Goldman Sachs plans to hold this bonds, they will sell them to clients and is a win for them in any case.

      And then when they end up in the hand of any vulture fund and the country has to actually do a default, those guys will insist on that 48%. And those large reserves of oil will be used, at the current bargain prices, to pay for this.

      So, no, we dont have to thank them for anything. They are the same as the chavista leadership. Doing anything to get their pockets even fuller.

      • Is Venezuela a sovereign country or isn’t it? There is no world bankruptcy system to make countries pay off their debts. Both Ecuador and Argentina have repudiated debts in the past 10 years and there is no way to make them pay.

        You should thank them because they’re picking at the corpse of Chavismo. Venezuela will still be around long after the Chavista government has collapsed and can just repuidate this debt once a few payments have been made (and at which time GS will have gotten way less than 48% return).

        “I very much doubt Goldman Sachs plans to hold this bonds, they will sell them to clients and is a win for them in any case.”

        Who do you think these people are? Who do you think Goldman’s clients are? Nobody here is stupid. Everyone knows how risky it is to loan money to the current Venezuelan government. Goldman Sachs isn’t taking advantage of anyone. It’s not a secret how risky these bonds are. Why do you think they have such a high % rate? Nothin is free in this world

        • “There is no world bankruptcy system to make countries pay off their debts. Both Ecuador and Argentina have repudiated debts in the past 10 years and there is no way to make them pay. ”

          Yes, there are ways to “force them to pay”, you simply cut the credits and rights to import.

          Two things Venezuela sorely needs to begin rebuilding after chavismo is ousted.

          • “Yes, there are ways to “force them to pay”, you simply cut the credits and rights to import.”

            Yeah, that makes sense for a country like Argentina. But guess what?Venezuela is a large oil exporter. You don’t even need to borrow money.

            And also, you can always continue to borrow money. Argentina was never cut off from credits and the right to import. Argentina was cutoff from paying taking out new loans in the US until the had paid off all their old loans in the US. But guess what? The US gov’t can always pass a law to change that in regards to Venezuela once the Chavistas leave power or you can borrow from someone else.

            We didn’t like Kirchener in Argentina so there was no political will to make a law to help out Argentina. We hate the Chavistas, (like the Chavistas hate us) and it will be much easier for Congress to just pass a law repudiating these debts in order to help out a new non-Chavista Venezuela

      • 1) Those are PDVSA bonds. Not “Venezuelan” bonds. While the difference is null for Venezuela, it opens a lot of venues for somebody to get paid. As in, all assets of the company overseas being seized.

        2) So, your theory is that I have to thank GS for their cunning plan to help us bring down Maduro by giving them money now and then getting who knows what return in the future, to be negotiated with who knows who, under who knows what conditions. Instead of doing the same shit they did with the mortage crisis, pack that shit, sell it to some other sucker down the line. Aha. Yea, because GS is that moronic.

        3) You can imagine what I want to say to you now after you pretend, twice, that I should cheer a group of parasites gambling with the country future while Venezuelans die of hunger, lack of medicine, or bullets. Which probably will be bough in the near future with part of that money. So, shut up, have some minimum decency.

        • “1) Those are PDVSA bonds. Not “Venezuelan” bonds. While the difference is null for Venezuela, it opens a lot of venues for somebody to get paid. As in, all assets of the company overseas being seized.”

          Only from PDVSA’s assets in the US. Don’t get me wrong, Venezuela is going to lose CITGO, but when Venezuela sells oil then the oil is transferred by ownership the moment it leaves the port in Venezuela and can’t be seized by foreign creditors. CITGO is nothing compared to the value of the actual oil you have in the ground in Venezuela.

          “2) So, your theory is that I have to thank GS for their cunning plan to help us bring down Maduro by giving them money now and then getting who knows what return in the future, to be negotiated with who knows who, under who knows what conditions. Instead of doing the same shit they did with the mortage crisis, pack that shit, sell it to some other sucker down the line. Aha. Yea, because GS is that moronic.”

          Venezuela is going to be in economic pain no matter what. The longer the Chavistas are in power the worse it will be. The sooner the Chavistas run out of money then they sooner they will not have money to pay soldiers and will no longer be able to hold onto power. Once the Chavistas are out of power then the US government will can pass a law to US bondholders of Venezuela to restructure their private holdings. (Which we’ve done in the past). We’re never going to make them restructure their debt holdings for money owed to them by people who hate us, like the Chavistas, but that won’t be the case once a normal government is back in power in Venezuela.

          “3) You can imagine what I want to say to you now after you pretend, twice, that I should cheer a group of parasites gambling with the country future while Venezuelans die of hunger, lack of medicine, or bullets. Which probably will be bough in the near future with part of that money. So, shut up, have some minimum decency.”

          And how many more Venezuelans will die of hunger if Maduro clings to power another 5 years? How many fewer Venzuelans will die of hunger if he runs out of money to power soldiers next year because of loans like this?

          • … this has to be one of the most idiotic lines of reasoning ever.

            Let me put this to you in no ambigous terms.

            You absolutely pathetic moron, WHY THE FUCK DO YOU THINK THEY ARE GETTING A LOAN THIS BAD RIGHT NOW, IF IT IS NOT BECAUSE THEY ARE OUT OF MONEY TO PAY SOLDIERS AND ALL THE STUFF. Dont come with your IDIOCY and then pretend you are the one with the moral high about how many suffering Venezuelans will be spared by you ABSOLUTELY IDIOTIC understanding of this. You are LITERALLY arguing giving Maduro 800 million $ now is GOOD. What the fuck do you think he is going to do with it, you cretin? The country is ALREADY BROKE, there is no fucking NEED to give them bad loans for a future default-as-regime-change idiocy; they ALREADY CANT PAY THE ONES THEY HAVE WITHOUT STARVING THE COUNTRY.

            Shut your fucking idiot mouth. We dont need Goldman Sachs help, and by God we dont need an idiot like you giving advice.

        • “CITGO is nothing compared to the value of the actual oil you have in the ground in Venezuela”. The thing is, oil in the ground does not belong to PDVSA, it belongs to the State, PDVSA has a concession to that oil. The sensible thing to do for a future PDVSA is to seek bankruptcy protection, after all, it is a corporation entitled to such a benefit. At this point PDVSA should qualify for a chapter 7 type protection, where all assets are sold and distributed among all creditors (including bondholders as well as commercial and labor claims)

    • Ok….Do you think Chavismo expects to survive unscathed until 2022? If you don’t, then wouldn’t you also think they did this deal knowing that it wouldn’t be their problem anymore by the time the debt collector comes knocking? Will Goldman really say” Oh it’s fine, we will forgive the crippling debt that the next government will inherit so long as they’re democratic because that is the core concept of business, naturally” ?
      And consider the opposite, if this in some magical way ends up working out in their favor, then Goldman also did this knowing what it would mean for ordinary Venezuelans.
      However you spin this, it is fundamentally immoral. This is what American imperialism looks like in its cruelest, basest form when providing CIA consultancy for dictators goes out of fashion.

      • Is this what American imperialism looks like? As opposed to Chinese imperialism when they lend 100 times as much money to Venezuela on onerous terms?

        • This is not what most Americans would want. I’m sure the Average American would be disgusted by this if they had all the facts. The comparisons to the Mortgage crisis are fair. This is how you invite socialism into a country and give capitalism a black eye. Just because it’s legal doesn’t make moral. Goldman should rethink this.

  3. My initial reaction was similar to yours. I am a GS stockholder and never would have supported anything that would put a dime in the regime’s hands.
    On reflection, I don’t think of this as such a negative event. I would rather see this debt in the hands of US investors than coming from China or Russia. The Russians and Chinese must have refused to give the regime any more money. Perhaps they are also recognizing the inevitability of a regime change.
    The US government has enacted laws in the past that force US entities with claims against a country to accept settlements that the US government negotiates. There is a possibility that this could be the final settlement of these bond payments. Goldman Sachs will not get much sympathy if they realize a loss. That is the risk of buying “junk” bonds.
    The US government will support a new democratic government. That will include aid and IMF loans.
    Now if they could just freeze the funds before they get to the criminals in Caracas.

    • I am not a financial expert, but it seems to me that Goldman has just bought itself a surefire loss, which they can use to offset taxes in the US. They help their stockholders by reducing their own tax liability. The morality of lending to the dictatorship in all likelihood was not considered important, if it was considered at all.

    • As a GS stockholder, you have the blood of those murdered by the government because that is what they have done with your money-paid the military and bought ammo.

  4. Except for the fact that Goldman’s fiduciary duty is to produce profits and they are doing so. The Venezuelan Government duty is the well-being of the citizens, which they are definitely not interested in fulfilling. Not sure this is the right comparison. Since when bankers have to are about the moral implications of their trades?
    Remember the Baron de Rothschild “Buy when there’s blood in the streets, even if the blood is your own”…nothing new under the sun here…

    • We don’t disagree. You are talking about what investors do in fact care about (profit). And I am talking about what investors ought to care about (profit + non-profit considerations, like not lending to gangsters). They are two different things, and they don’t contradict one another.

      • Why do you think the Soviet Union collapsed? Why do you think communist East Germany collapsed?

        These countries collapsed in the 1980s’ because they owed lots of money to western capital they had borrowed and their economies were unsustainable. And guess what? By the 1990’s they were free again and economically recovering.

        The same thing will happen in Venezuela once the Chavistas collapse. The difference is the new non-Chavista government will have lots of oil to sell.

        Goldman Sachs are not acting like investors lending money to Venezuela. They are acting like ruthless Gangsters lending money to Venezuela. And it takes a gangster to kill a gangster. Once this is all over the US congress can pass a law resturcuting US bondholders of Venezuela debt, but only after the Chavistas leave.

        • Eastern Germany had huge streams of inflow from Western Germany. We speak about 2 trillion Euro between 1990 and 2015. Things are getting more normal now.
          We are much less generous to Greece. Once I asked in a forum, if they know a country with similar BIP figures like Venezuela 2013-16. People brought up Greece 2012-16 and they are right.
          Russia was in deep trouble iduring 90ties. Not small part of their population emigrated to Western Germany.
          Debt does matter.

        • I lived in Venezuela in 1990’s through 2002. The gangster’s were already there. A lot coke comes out Venezuela – the politicians, military and uncivil servants – and all mixed in the crime – all gangsters, It’s been that way for long time. Oil is secondary – you got get high (how do think Goldman Sachs leaders get their high – from coke from out Caracas). The murder rate has always been high (like most Latin America – 20 times what is in Chicago). By the way – Your lack of knowledge of the way things really work in 3rd world worriers me a lot – You need to live there.. (let kwon me so a take life issuance policy you.

          Furthermore – Crude oil from Venezuela crappy – that why they can’t sell much it anymore.

    • Its not “new” debt. The BCV sells bonds for PDVSA debt they already have.

      On the other hand, it is “new debt” in the sense that now somebody else is going to want that money, instead of just moving it from debt PDSA to income BCV.

  5. They’re probably planning on restructuring it with something like 60% haircut, a moratorium on repayment and a lower interest rate. They still come up on top and look like decent guys, giving Venezuela a break.

    If Venezuela pays up, then well, their loss.

  6. The transaction is so crassly and unconscionably onerous to the countrys interests that it advertises loud and clear the utter desperate state of the regime finances at this moment ……..!! the bonds have been sold at a distressed price such as only someone who is close to a total financial meldown might consider.

    The reason why a constitutional assenbly is being voted in july is because they fear that by october (when the next set of bond payments fall due ) Pdvsa and the country will be publicly bankrupt. and wont be able to face the social firestorn that bankrupcy such will cause .

    Not sure that public officials are off the hook just because the bonds were lawfully issued prior to their sale. the damage to the countrys finances is so gross that legally they will be liable for having effected such harmful deal .

  7. Does title “Meth Finance” imply that PDVSA is now is now getting to “Speed” not “Coke” (due to margins), like everyone else in government in Venezuela.

  8. After a regime change, PDVSA should selectively default on these bonds. I believe it is not so far-fetched to make the argument that a default on these bonds does not trigger cross default provisions in all other bonds. Cross default occurs when the issuer fails to pay other indebtedness, which is defined as “any obligation for the payment or repayment of money which has been borrowed or raised.” It is not entirely clear how these bonds ended up on Banco Central’s balance sheet, apparently they were issued by PDVSA in exchange for Bolivars (VEF6.3 per USD), either directly or through Banco de Venezuela. Does this count as money borrowed or raised? Even if it is unconstitutional for Banco Central to lend to PDVSA?

    • Unfortunately, selectively defaulting on these bonds triggers cross-default in the rest of PDVSA’s obligation, as it represents an indebtedness higher than USD100mn. Apart form that, although I have not had the chance yet to take a look on the prospectus on this bond, it’s very likely it has cross-default and cross-acceleration clauses too. Probably NY law too, because I don’t think GS would purchase Venezuelan law bonds. I’ll get back with more info if I catch the prospectus somewhere.

  9. I always find it interesting that when someone says something the other person doesn’t agree with, there’s this need to insult the first person. His/her ideas may be wrong, but what the other person needs to do is present a different point of view. If the other preson is not convinced, one can try again or just leave it alone. It’s not like everyone has all he right answers. If that were the case, we wouldn’t be in this situation.

    Anther thing we Venezuelans lie to do is yelling. He who yells the loudest believes he7she is winning the argument.

    • NAH! I saw two guys on a street one nack from Rio de Janeiro in Las Mercedes, uino comiendose la flecha, y el otro no. El que no, apago su motor y se puso a lear el periodico.

  10. This is not much different from the bridge disassembly we are seeing in Caracas, probably their bet is that they will not be around for much longer to face even a legal challenge

  11. Reuters: Venezuela opposition accuses Goldman Sachs of financing dictatorship.

    “Goldman Sachs’ financial lifeline to the regime will serve to strengthen the brutal repression unleashed against the hundreds of thousands of Venezuelans peacefully protesting for political change in the country,” wrote Julio Borges in a letter to Goldman Sachs President Lloyd Blankfein.

    “Given the unconstitutional nature of Nicolas Maduro’s administration, its unwillingness to hold democratic elections and its systematic violation of human rights, I am dismayed that Goldman Sachs decided to enter this transaction.”

    The letter adds that Congress will open an investigation into the transaction and that he will recommend “to any future democratic government of Venezuela not to recognize or pay these bonds.”

    A Goldman Sachs spokesman said the bank declined to comment.

    Venezuela’s Information Ministry, which fields queries on behalf of the Finance Ministry, did not respond to requests for comment.

    More at the link.
    Though given the projected cash flow, it is difficult to see that Goldman Sachs is financing the dictatorship. It would appear to me that Goldman Sachs is taking advantage of the dictatorship.

    • Oh yes, they are. Last grasps of Maduro trying to hold into power, this money will be used to pay for the DICOM’s preferential rate for enchufados. Last looting of the piñata, to be paid by the post-regime Venezuela. This is a bet to another Greece, another Argentina, where after the communist madness ended, the people had to suffer even more just to pay for the debt that their repressors .

      Borges has to put as much pressure as possible, but we simply have no choice to pay since is either that or default, one of the chavistas’s last acts in power is going to be to make sure that the people suffer as much as possible for their rebellion against them.

    • Good for Borges. Expect further questionable fire sales, probably in the domestic petroleum sector. The amount lent here is a drop in the bucket of needs, but is unconscionably usurious for a starving/beleaguered country, probably not the worst such deal GS has done, if the whole truth/nothing but the truth were really known….

  12. The only positive thing I see here is that this transaction is proof to the World that Maduro is running on empty.

  13. Apparently the US Congress is gonna investigate the deal.
    What would be the point of the US sanctions to key Chavistas in the regime if on the other hand Wall Street in going to finance the regime and in unscrupulous terms.
    Congress could and should stop the deal as they have done with other black listed countries and organizations, lets hope is not too late.

  14. To me, the real question is what the money is going toward. The security forces must be paid. Period. If congress kiboshes this deal, Maduro won’t last a week. Whoever has any power or wherewithal will start sniffing out some other cash flow, including bail out money.

  15. Esteemed fellow scribes. When first reading these pages it soon became apparent that many co-respondents here have attended an economics course or two. What I would like to know is at what point do the instructors state that the evidence suggests US financial institutions operate from a Judeo-Chiidtiuan moral and ethical foundation? I believe that a close examination of the US banking and other such institutions, particularly since the beginning of the 20th century, would reveal the opposite to be true. Bankers are crooks and the media always lie, accept these two statements and you are now an adult, no longer a starry eyed-dreamer.

  16. Great piece! This discussion is important and will last for a long while. Looks like Argentina is not the only kid in the block with an ridiculous debt problem…

  17. For what I read, GS didnt buy direclty, there is a London firm nobody seems to know much about in the middle of the transaction….

    … they did not only sold thing at a huge discount, they made a “guiso” out of it too, no?

  18. Frank,

    Your cashflow projection assumes that the central bank won’t unwind the deal at some point in the future. The deal is probably a repo. The central bank could easily turn around to GS in 2019 and terminate the repo after paying interests, in which case they 48% IRR goes out the window. As in the Fintech case, the interest rate for this deal is a crucial piece of information. Again, I presume it would be in the 6-8% range. We won’t know the details until the 2017 statements are published.

    It will be interesting to see what the central bank plans to do with the money from the sale. But we will probably never know.

    • Epa! It’d be great to learn that this thing is a repo, –that would make it much less bad– but nothing in the WSJ piece or subsequent coverage suggests that. I think it’s wishful thinking. But still, for the sake of the country, hope you’re right.

      • Frank, it’s speculation but not crazy to think it though. Why? Well they did exactly that in the transaction with Fintech (same bond if I remember well?). Only time will tell!

  19. “The Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. §§ 78dd-1, et seq. (“FCPA”), was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.”

    https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act

    Question: Would not giving publicly notorious corrupt government officials access to money, in order to obtain a 48% internal rate of return on an investment, classify as illegal under the Foreign Corrupt Practices Act?

    http://unsustainabledebtsustainability.blogspot.com/2015/10/we-must-not-allow-vulture-funds-to.html

  20. Google, “Goldman Sachs Venezuela,” and you will see this thing is already going viral. The good thing here is that, although few people know or care about Maduro and Vzla, EVERYONE knows (and hates) Goldman Sachs. Remember the bailout? Remember, “Occupy Wall Street?”

    We can make lemonade out of this. Put Maduro in bed with Goldman Sachs and believe me, people will suspect a marriage made in hell. We have the internet, we can do it. Remember United Airlines?

    I predict Congressional/Senate hearings and a Trump bitch-slap to Lloyd Blankfein. The rest of Wall Street will take note.

  21. The only reason you would borrow at such insane rates, is because you know you’ll never have to pay it back. Politicians can afford to do this, because they are stealing the money and the people are the ones that will have to pay it back.

  22. Great piece of reporting. On this weekend, when we honor the greatest self sacrifice, GS acknowledges an outrageously rapacious deal. Higher management had to be involved or at the very least, consulted. Appallingly, GS admits that Venezuela is in crisis and “that life there has to get better, and we made the investment in part because we believe it will”

    In the name of the people from Venezuela, we thank you for the $865 M lifeline to the Maduro regime. The amount lent will likely be used to pay for repression and increase Maduro’s cronies bank accounts. It will bring additional short and long term hardship to Venezuela. What is the use of Govt. sanctions to the Venezuelan gangsters when we have GS?

  23. GS is in damage control. They offered up this “deal” because they thought it would help Venezuela? At 48% interest? That things would improve later, and that this great “deal” would help Venezuela?

    The sooner this corrupt government goes belly up, and “deals” like this go Tango Uniform for GS, the better.

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