[Update: As of 7:47 a.m., Reuters says its sources say PDVSA is paying.]

In a normal country, with normal institutions that communicate normally because they’re run by normal people, payment dates are drearily boring. But that’s not how Venezuela rolls. Here, bond deadlines have a peculiar kind of rhythm. It starts to build up a few weeks before and just builds and builds and builds running up to the deadline — a maelstrom of rumors and tips, stories true and false, nerves and antacids and Xanax and whiskey thrown around with abandon.

Today is one of those days. Ammortization day. A-Day.

By the end of trading, PDVSA will either have paid up the $985 million it owes to Wall Street or it won’t have. If it doesn’t, a dismal chain of events will go into motion. A three day micro-grace period attached to Credit Default Swaps starts ticking. If, by the end of that period on November 1st there’s still no payment, bondholders will be able to start a process that would allow them to accelerate payments on all other PDVSA bonds — so, payments that were supposed to be due decades from now, will have to be made on Monday.

If PDVSA is unable to pay, hot-shot Wall Street lawyers will make a bee-line to their nearest federal court to make claims on PDVSA assets — meaning every PDVSA asset vaguely within reach of a U.S. court will be up for grabs. Tankers, refineries, CITGO, investments in Europe, millions of dollars in accounts receivable, even oil cargos themselves.

Total lunacy is the only way to describe the swings in PDVSA bond prices yesterday.

Elementary logic suggests PDVSA will pay. It always has, and it has spent all year preparing for today. You know why there’s no food at the store when you go grocery shopping and how you can’t afford what’s there? That’s because PDVSA has been hoarding almost every dollar it makes from oil sales all year precisely so it can make that payment today. Having done all that, it would be total lunacy to still miss the payment today.

Then again, it’s 2017: total lunacy is the new normal.

Total lunacy is the only way to describe the swings in PDVSA bond prices yesterday, which swung all day as jittery investors tried to piece together if a payment would come or not.

Total lunacy is what Alejandro Grisanti was pointing to, with a tweet last night that will have kept more than a few bondholders awake into the wee-hours:

So, will PDVSA’s payment clear today? Will it pay only to miss the even bigger payment due next week?

I don’t know. If I did I’d be speculating in the market and making a few million dollars instead of wasting my time here. (Which incidentally is what every politically-connected finance guy in chavismo’s orbit has been doing non-stop for the last few weeks.)

What I know is that with every debt maturity, the orgy of rumors and speculation and market manipulation grows more intense. That smart, knowledgeable bond people go a little crazier each time. And that all the intense speculation about the when exists alongside a strange unanimity over the whether: everybody knows default is inevitable, nobody knows when the ax will come down.

 

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24 COMMENTS

  1. But, Quico, you are the guy with inside knowledge.

    “PDVSA is a black box. We shine a light on the inside.”

    You must be able to make an educated guess? Do your VEB subscribers get a thumbs up or thumbs down?

  2. where is that friend of yours that sells “Veny” bonds? how is he doing? I hope he is having a crack today, god bless him.

  3. Quico, Thanks for detailing the payment issue. Your expertise is appreciated.

    The elephant in the room is “Will default lead to a change in government?” Any speculation?

    • No it won’t, a default is part of the Cuban plan. He who thinks that the Cuban Narco Chavista regime isn’t COMPLETELY ANTICIPATING what’s coming right at them is hugely underestimating these guys. They have been many moves ahead of the game since the get go in 1999. There simply aren’t any “surprises”, there’s only a set plan that they folllow by the letter.

  4. Good article! I agree with Ronaldo, though, that it would be interesting to know a bit more about how default might play out.

    Would Citgo be taken over and run by a US court to insure investors are not stiffed? If oil and assets are seized, would that simply mean nothing could be imported to Venezuela, including food, machines, everything?

    If it really is inevitable, what are the implications?

  5. IF there are $9.8 bill. in intl. reserves, even if only/mainly in gold, of course they’ll pay today, and the rest of 2017. Next year, 2018, with $9 bill. or so to be paid, is probably impossible, and, even though Cuba was able to stiff its intl. creditors and get away with it, Venezuela, somehow avoiding intl. oil assets’ seizure by creditors, while still somehow selling to China/India/et. al., and still surviving economically/feeding its 30 million population, is an iffy proposition, at best.

  6. HAAAAAAAAAAAAAA! Here we go again. Francisco, please, pleaaaaaaase have some self-respect. It’s embarrassing. Once again, your forecast is wrong. Now you are going to justify it and create a post-fact narrative saying that the govt. is starving people, that they have taken unprecedented measures, that no one could have imagined that they were going to go to this extent to keep paying (but here I have been for a few years in row now screaming from the bottom of your ivory tower that you are mistaken), bla bla bla bla bla. But the bottom line is: you have been wrong, you are wrong now, and most likely you will keep being wrong in the months and years to come.

    I don’t have time to keep telling you why you have been wrong, just look for my posts from 2-3 years ago, the logic is still very similar.

    And again, don’t take this as a personal attack. I usually enjoy most of your other articles except when you start going into matters in which you clearly have no expertise (an economist title doesn’t exactly entitle you to opine on those topics, in fact, it is more of a hindrance).

    Yours truly,

    Venny Trader

  7. Is there any certainty that the foreign reserves that are reported to be slightly less than US $10 billion, actually exist?
    Earlier this year the regime was reported to be trying to peddle a bond with a US $5 billion face value for US $1 billion.
    Discounting a bond 80% seems like a strange thing to do if you are holding ten times the asking price in foreign reserves.

    • Much of the “foreign reserves” are likely mortgaged with some kind of repo scheme that allows them to be carried at face value, until the loaned amount plus interest isn’t repaid–also, who/what entity are certifying that the $9 bill. really exist, besides the BCV/Torino Capital/friends?

  8. Contrasting Cuba with Venezuela is ludicrous. The only real cash flow going INTO Venezuela comes from oil. Having stiffed most of the providers and service operators, having neglected upkeep and retrofitting and upgrading, having lost the majority of educated oil engineers, having lost storage units, shipping oil full of junk and salt water, basically with the oil industry just muddling along on one foot, whatever crude Venezuela DOES ship is dwindling fast, ergo income is tanking as well. There ain’t no quick fix on any of this. Simply put, the means Venezuela has of generating an operating income is dying, and a tipping point was reached this last month and the corpse will start rotting soon.

    Now move onto the bond payments. Someone suggested that the Cubans have it all figured out – that Maduro can default and still hold onto power. That is, he can run a country that not only is in spectacular debt, but it can do so with no money. That, my friends, is absurd.

    For starters, the idea that the Cubans can outsmart the entire western world is just plain silly. The relative intelligence of any country is reflected in the shape of the country itself, and Cuba, by any measure, is a shit hole decades behind the times in everything but health care. Second, the so-called Cuban strategy of snubbing the Yankees assumes that while the bonds go unpaid, Maduro can backdoor oil and still keep the cash rolling in. Not remotely so. If the western world is owed hundreds of billions of dollars, and the debtor is trying to sell product behind their backs, they’ll start comandeering freighters on the high seas, will garner every dime going through whatever banking system that is transferring monies to Maduro. They will literally either starve the guy out or force him to flee, and the idea that he can still rooster around with no funds, no food, no medicine, is a 3rd world fiction.

    This guy and the Chavistas at large, and the stooge Cubanos who have been “advising” him will get blow right outta the water once the first bond goes unpaid. And I’m with whoever else who said they doubted reserves are anywhere near the 9 B they claim. And more than that is owed next year.

    Chamos, if this ain’t the end game, what is?

  9. ………….and the idea that he can still rooster around with no funds, no food, no medicine, is a 3rd world fiction. Chamos, if this ain’t the end game, what is?

    JL I hope you’re right. I’ve been wrong so many times.

    • Trouble brewing, as Putin offers to restructure nearer-term Venny debt, relieving nearer-term pressure, allowing further/(final?) consolidation of the Regime–just another reason for the Final Solution….

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