Today is the day financial markets have been expecting/fearing forever and a day. Just after 6 p.m., Nicolás Maduro got up in front of the cameras and announced Venezuela couldn’t keep paying its debts, and needed to restructure.
The timing for the announcement is enormously weird. PDVSA just paid, with difficulties, the amortization on its 2020 bond due last week. Why would they kiss $800 million goodbye just a week ago if they knew default couldn’t be helped from next week?
Even more bizarrely, Maduro announced the government will still fully pay the $1.2 billion PDVSA 2017N principal payment due today.
On its face, this makes no sense.
There is zero upside to paying last week if you’re just going to default anyway next week. And there’s even less sense in announcing you’re going to make just one more payment tomorrow if you face default directly afterwards. Why not just steal the $1.2 billion?
Maduro couched his statement as a call to restructure Venezuela’s debt. But nobody’s fooled. Restructuring means default, because “restructuring” — a negotiated outcome agreed with bond holders — is totally impossible in current circumstances. It cannot happen, for many many reasons.
To begin with, Maduro tasked vice-president Tareck El Aissami, a designated Drug Kingpin on an OFAC sanctions list to lead the restructuring. It’s not even legal for bondholders to meet that guy, much less negotiate with him…nor is it legal for them to restructure in the first place, since there are sanctions in place against that.
But even if Tareck wasn’t radioactive and sanctions didn’t rule restructuring out, it’d still be unrealistic without major, sweeping policy reforms, which Maduro certainly isn’t promising. Without them, you’d end up having to offer 30% yields or some similarly crazy high number. This just isn’t the way international finance works
And even if Maduro did promise sweeping neoliberal policy reforms, restructuring would still not be feasible, because PDVSA bonds have no collective action clauses, so it’s practically impossible for the government to deal with holdout bondholders. Remember what happened to Argentina’s debt? Well, multiply that by three.
Long story short, this talk of “restructuring” is just noise. They can’t restructure. They’re just defaulting.
Why would they announce they’ll stop paying after they make just this one last payment, on the PDVSA2017Ns?
One way to see it is that this is about the political marketing of an already expected default: an attempt to soften public opinion ahead of the inevitable. But if so, why would you exempt the 2017N maturity due today? Why would you pay that bond even after you’ve announced default? It’s an especially hard decision to square with rationality as the rest of the world understand it.
And so we’re back to the opening puzzle. Why would they announce they’ll stop paying after they make just this one last payment, on the PDVSA2017Ns?
One possibility is that this is all an elaborate bluff. A bit of high-stakes market manipulation designed to send the price of all all Venny bonds plummeting. I know that sounds out there, but there’s some precedent: Ecuador very publicly did something similar back in 2009, with considerable success.
There’s an argument to be made that Ecuador is not a suitable comparison because of the extremely different magnitudes we’re talking about (A single, USD 3.2Bn issue versus $60+ Bn worth of financial debt and god knows how many skeletons in the closet). If it’s a bluff, it’s an enormously high-stakes bluff. However, the Citgo-backed PDVSA 2020s could be a buyback target in such a scenario.
Along the same lines, perhaps the plan is for China and/or Russia to buy up some bonds tomorrow at bargain basement prices: a sweetener they agreed to in return for more Oil Joint Ventures, refineries, guisos and Delta Amacuro state. Why not?
Piensa mal y acertarás, my grandma used to say.
My best guess is that, hey, this is Venezuela…a place where it pays to be in the know. And people who are “in the know” often happen to be in need of some rather high dollar-figure money laundering solutions.
Piensa mal y acertarás, my grandma used to say.
Last week, trading in 2017Ns saw unprecedented volume. The kind of volume you’d expect if a few very rich, very well-connected people had reliable information that the 2017Ns were the last bond Maduro was planning to pay.
That’s the kind of volume that could be interpreted as a massive money laundering operation, with tons of enchufado dirty money rushing in to buy-up a sure-thing bond. The last of the sure-thing bonds. Because the proceeds of a bond-payment are seen as squeaky clean. Why steal $1.2 billion and leave them stranded in dirty-moneyville when you can just as easily launder them?
The only thing we can be sure of is that the longest, baddest legal battle in Venezuela’s history is just around the corner here.
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