The fact that Venezuela has irresponsibly taken on enormous levels of debt isn’t really a question. In a flash of clarity back in October 2015, Even Maduro himself said: “We were a country that had income for several years of 90, 100 dollars a barrel of oil. And yet, truth be told, we were spending 120, 130. We were spending more than what we were taking in, and we took in a lot.”

Debt grew due to an explosive mix of inefficient public spending, a complete lack of fiscal oversight from the pro-government majority that ruled the National Assembly up to 2015, and the existence of little-known legal loopholes of approval by the National Assembly.

When a new opposition majority was settling into Parliament, many had high hopes for some oversight into the fiscal wreckage. However, the government set up roadblocks via Supreme Tribunal decisions to avoid any oversight in the way they use the country’s checking account.

The National Assembly wouldn’t approve most créditos adicionales and requested to raise the debt limit through the so-called Ley Paragua. The government ignored it. From January 2016 up to mid-May 2017, Maduro signed, sealed and delivered BsF.4.8 trillion in additional resources via Economic Emergency Decrees you know, the same Decrees that were Constitutionally blocked by the National Assembly but approved but the Supreme Tribunal anyway.

Then came an unexpected decision by the current opposition resistance move: decision No. 156. It authorized the President to amend Venezuela’s legislation on hydrocarbons – specifically article 33 so he could establish joint ventures in the sector without the authorization of the National Assembly. And, as an afterthought, the sentence declared that the National Assembly’s constitutional prerogatives would henceforth be exercised by the Constitutional Chamber or by another body that the Chamber appointed to that effect.

From January 2016 up to mid-May 2017, Maduro signed, sealed and delivered BsF.4.8 trillion in additional resources via Economic Emergency Decrees.

In any case, the National Assembly has kept on trying to push back any way it can. It issued the “Agreement on the Nullity of the Indebtedness and the Creation of Joint Ventures Companies, Unconstitutionally Entered Into Without Parliamentary Approval and to the Detriment of the Nation’s Patrimony”. In the accord, the Assembly warned foreign banking institutions about the nullity of monetary gold transactions entered into without its approval.

Maduro keeps on talking about the so-called international financial blockade, but it now includes a National Assembly that has the nerve to try to approve budgets and bonds.

National Assembly deputies, like José Guerra, have systematically said that any debt contracted without the authorization of Parliament would be considered void. That makes for a whole bunch of worried investors. Guerra has even claimed he knows for a fact that both the Latin American Development Bank (CAF) and the Inter-American Development Bank (IDB) will no longer make loans to Venezuela because the government hasn’t had the debt ceiling law (Ley Paragua) approved by the Assembly to support the request.

Corina Pons, Marianna Parraga and Olivia Oran from Reuters report that, in recent months, the opposition majority in the National Assembly have sent letters to 13 banks to try and stop the financing of Maduro’s regime. These banks include big names such as Citigroup, Bank of America, JPMorgan, Wells Fargo, UBS, HSBC, Barclays, Credit Suisse, Bank of China, China Construction Bank, the Chinese ICBC and even Goldman Sachs and Nomura.

The letters stress that the duly elected Assembly has not approved new credits and exhorts the banks to think twice before doing business with a regime that has long shown a willingness to take on absolutely reckless amounts of debt.

The opposition majority in the National Assembly have sent letters to 13 banks to try and stop the financing of Maduro’s regime.

Although we haven’t seen any of the 13 letters, a New York financial operator claimed that they were actually some sort of “moral reminders”. And not to be cynical or anything, but morals aren’t what have kept Wall Street going.

And this is where the whole Goldman SachsNomura crazy act just begins.

BCV previously sold untapped PDVSA 2022 bonds to Goldman Sachs and, as stated by our very own Frank Muci, “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.”

Just as the news came out, the President of the National Assembly, Julio Borges, sent a letter to Lloyd Blankfein, executive director of Goldman Sachs. The letter claims that Julio is “concerned and outraged that Goldman Sachs has decided to enter a bond purchase transaction of $ 2.8 billion with Venezuela’s dictator” and that the transaction violates “Goldman Sachs Code of Conduct and Statement of Human Rights.”

Borges added that “the National Assembly will soon launch an investigation into the matter. I also intend to recommend to any future democratic government of Venezuela not to recognize or pay on this bonds.”

On May 30th, the very next day, the National Assembly approved a proposal put forward by deputy Ángel Alvarado to investigate both the BCV and its President, Ricardo Sanguino. The investigation was to determine the role that BCV and its president had in the Goldman Sachs operation including possible bribes and kickbacks.

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.

The National Assembly decided to also ask the US Congress for an investigation into Goldman Sachs to establish its criminal and administrative liabilities. It should be noted that right after the PDVSA 2022 transaction, a member of the Florida Senate, José Javier Rodríguez, decided to initiate an investigation of Florida links with Goldman Sachs.

Right when the  “hunger bonds” movement became a thing, Nomura bought US$100 million in Pdvsa 2022 bonds for only US$ 30 million. Fishy, huh?

On June 1, Julio Borges sent a letter to Nomura Holdings chief executive Koji Nagai, which stated: “There must be a way for Nomura to seek profit that is not made on the backs of the misery of Venezuelans” and “Nomura is violating its own Code of Ethics”.

Borges added that “the National Assembly will conduct a thorough investigation of this dubious transaction and leave no stone unturned to assure that a future democratic government of Venezuela will not have to pay on this immoral debt entered into by an illegitimate authoritarian regime.”

These are serious threats – delivered formally. Kudos to our asambleístas for showing some spine.

However, as we wrote about in the beginning of May, “Not all debt requires National Assembly approval,” the government still has legal loopholes to borrow money from whomever is willing to do so.

There must be a way for Nomura to seek profit that is not made on the backs of the misery of Venezuelans.

Some may argue that selling the Pdvsa 2022 ghost bond doesn’t require the approval of the National Assembly since it’s not a new bond issue and they are simply being placed in the secondary market.

After talking to a couple of lawyers, we concluded that the National Assembly letters are actually moral reminders: don’t hate the messengers, hate the message. And maybe, just maybe, the likes of Goldman Sachs and Nomura are willing to accept such deals because, despite the immorality of the transaction, it’s legal. The banks probably also think they won’t get their money back.

The problem with these moral reminders is that they’re aimed at the wrong target. This is a story about corruption, and the corrupt people who sold out the nation’s interests.

According to article 91 of the Ley Orgánica de la Contraloría General de la República:

Without prejudice to civil or criminal liability, and to the provisions of other laws, the acts or omissions mentioned below are considered generators of administrative liability.

2) The omission, delay, negligence or imprudence in the preservation and safeguard of the property or rights of the patrimony of an entity or body of the ones indicated in the numerals 1 to 11 of Article 9 of this law [including the Central Bank of Venezuela].”

Also, article 55 of the Ley contra la Corrupción clearly states:

Any of the persons indicated in article 3 [directors and administrators] of this Decree with Rank, Value and Force of Law that having, by reason of their position, the collection, administration or custody of public assets or in the possession of any organ or public entity, shall be punished by imprisonment of six (6) months to three (3) years, when due to imprudence, negligence, malpractice or failure to observe laws, regulations, orders or instructions, lose, deteriorate or damage such property”.

If selling bonds at 30-31% of their face value can for any reason be considered a damage to the value of public property, then those who approved the transaction must face legal consequences. Right? RIGHT!?

This is a story about corruption, and the corrupt people who sold out the nation’s interests.

But after some more investigation, we have now learned that there is an even worse deal than the PDVSA 2022 bond.

It’s called the VENZ 6.5% 2036, which was issued in a private placement to State-owned Banco de Venezuela in December 2016 at the official Dipro rate of BsF 10 per US$. Now, as CaracasChron has explained, five billion dollars of the face value of this phantom bond is being sold for the ridiculously low price of 20 – TWENTY – cents on the dollar.

It took the National Assembly only a day to include the matter in its agenda and on June 6  unanimously approve an agreement in rejection to the illegal sale of the VENZ 2036 bonds.

These decisions are not based on what’s best for the country – but what’s best for their own pockets. And these are the type of horrible transactions the opposition majority of the National Assembly has been trying to block.

This isn’t about morality; it’s rather about salvaguarda safeguarding the public’s property. People who want to only misuse public resources are criminals. Selling a public asset for far less than it’s worth is an act of corruption. That’s where the focus should be.

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  1. Nice article. You bring to light a lot of information not welll-publicized elsewhere,

    Just one minor clarification lest populist prejudice get ahead of fact: BCV did not sell the 2022 bonds to Goldman Sachs. BCV sold that lot of 2022 bonds to Dinosaur, a brokerage headed by a Venezuelan. Dinosaur subsequently sold the lot to Goldman Sachs, and $100 million to Nomura, each of whom bought those bonds from Dinosaur. As far as I know, as clarified a few days ago by Francisco and Jau in the comments to the article “Venz36: Insult to Injury”, Dinosaur delivered the dollars to BCV.

    The AN has an elected supermajority which was incorrectly nullified by the TSJ, in my opinion. They just chose Amazonas to nullify. Had it not been Amazonas nullified, it would have been some other state.

  2. Sigh…

    The entire article relies on one thing: the presumption that the 6% 2022 PDVSA bond is actually worth more than the Govt sold it for. You do realise that there is no actual proof that the bond could have been sold for higher other than a price derived from a theoretical cash flow model (probably dictated by Hausmann to Borges so that he could plug it in his letter – he should have also asked Hausmann for a spell check by the way). In fact, it hasn’t traded at that price. Why do you think that is? The more time that it goes by without that bond trading at a higher price, the more justified it was for GS to paid what it paid. Moreover, almost every credit agency, bank analyst, opposition leader, has publicly trashed the Govt’s ability to pay, reputation etc. and all of a sudden you are surprised that the bond is sold for too little? Seriously? You can’t have it both ways…

    Could there have been more transparency? Yes. But all this 41% price is just a political thing. In the current environment, they wouldn’t have been able to offload $3bn. of bonds with a 6% coupon (very low for our standards) without pushing the entire price curve downwards. Everytime they came out with a new issuance and floated it publicly, the prices went down (its basic demand/supply). The old 22 bonds trade at 21% cash yield, the new ones at 30%. Why the difference? New supply, lower oil price, more instability, etc. etc…La gente creyendo en pajaritos preñados….

    • Lets assume that the following is true:

      BCV sold PDV22 @27 to Dinosaur
      Dinosaur sold PDV22 @31 to Goldman Sachs

      Any comments?

      • It’s called financial intermediation. By the way, bid/offer spreads in Venz/PDVSA bonds are typically 2-3 points. Not since a week ago or two, but for a looooong time now. The more volatile the market is, the wider the bid/offer spreads are. High yield/EM bonds all usually have a 1-2 spread at least between bid and offer price. So if a broker like Dinosaur (which may or may not be involved in shady deals) adds 1-2 points to the price once they bought it, it is the normal thing to do, that IS their business: making a market. So you can call into question whether Dinosaur wasn’t the best broker to place this, etc. but talking about spread differences as to make it look as if it is something questionable is just pointless. And once again, beggars can’t be choosers so
        don’t expect a world class broker to deal with Venezuela if everyone and his dog is saying the country is going to default. There is obviously significant counterparty and credit risk involved in the transaction.

        • Financial intermediation for such a large trade is measured in bips not in points. Much less 4 points. 4 points is highway robbery, not financial intermediation, unless Dinosaur had to pay LA COMETA, which is robbery anyway. I really cannot believe that you dont see it.

          Anyway, you forgot to mention reputational risk which is pretty important to me. Obviously not so important to Dinosaur.

          • Po-tay-toe, Po-tah-toe.

            1 point = 1% point = 100 bips.

            200-300bps bid/offer spread is not crazy for $3bn of bonds which have never traded. Not too many days ago, I bought 2035 bonds, 250 bips above the bid price. So, what is the issue again? Consider 2035 bonds are very liquid if one where to compared to say $3bn of bonds which have never seen the market.

            And yes, reputational risk as well. By no means was the purpose of my previous message to make an exhaustive list of all the reasons to justify such a large spread; the two reasons I listed were more than enough.

  3. Someone should read the Ley del BCV provisions on the obligations of the board of the BCV , among other things it makes them liable for any transaction that causes losses to the countrys interests , if you sell govt bonds at less than its face value then to scape liability you may be called to show the need for the transaction to be made and why it was sold at less than the face value , i,e,at a value which was that which got paid……, how do you show that was the market value…..there will be room for a lot of opinions, and if the judge thinks different then ……off to jail you go…..!! Knowing judges I have an inkling that they might find that the transaction was overly onerous to Venezuela ……

    • Bill, that is all fine. But selling bonds below par doesn’t constitute on its own something illegal nor does it directly imlply a loss to anyone. Companies and countries do it all the time. Yes it can deteriorate the cash flow position of a country or a company and strain it even further, but that is different story and you need to take into account more variables. Now if I were to consider what has been better: the issuance of a 12.75% PDVSA or the issuance of a 6% PDVSA 2022, I would go for the latter. The majority of the old bonds were also issued and paid in local currency, the main difference being that the buyers were mostly individuals as opposed to BCV. Why is the market asking for a higher yield now? Because the country’s fiscal and monetary position has deteriorated since then. I really fail to understand how is it that people here have kept bashing the country and PDVSA ever since I had memory and now are angry because they can’t sell bonds at a price that is high enough? Really? You don’t see a problem at all in the logic of this?

  4. Venny I see your point , in a different business area I even made the same argument when someone made what to me was a great deal under the circumstances and yet was savagely criticized because he ‘could have done better’……the thing is that such a big a gap between the facial value of the bonds and their realized value easily raises question as to the wisdom of the transaction , did it need to be done exactly on those terms ?? could it have been done at a more opportune time ?? trying to show that the price was exactly the right market price isnt so easy and makes it possible for a judge (not always a man well versed in financial transactions ) to look at the transaction with suspicion or misgiving . The fact that an intermediary was used doenst really mean anything , anyone can use an acomodating intermediary to do a deal thats not exactly kosher to make people believe that its was independent from the one he would have made directly……!!

    So many of these deals being done now make one suspect one of three things that the regime is financially really at the end of its tether to accept such onerous terms , that maybe there is some hanky panky going on (would it surprise you from this regime ??) or that the regime is applying a scortched earth tactic so that if there is a regime change its succesor will face a very difficult task…….maybe a combination of two or more of the above……


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