Venezuela Ruled to be in ‘Selective Default’ over Failed Debt Payments

On November 13^th, Venezuela was ruled to be in ‘selective default’ by two major ratings agencies after the countries failure to carry out debt payments on sovereign bonds as well as PDVSA bonds that were due in October. Venezuela is already suffering with a serious humanitarian crisis, struggling to provide citizens with adequate food and medicine, and this default holds the capability to exacerbate this humanitarian crisis even further. If Venezuelan bond holders were to demand full and immediate repayment they are legally entitled to seize the countries assets. In the case of Venezuela these assets would be its oil barrels from the state owned oil company PDVSA. Oil exportation is Venezuela’s main source of income outside its borders, and the seizure of these assets would have huge economic repercussions. Given 93% of the countries exportations are crude oil, which in turn makes up 50% of the country’s GDP, the seizure of oil assets by Venezuelan bond holders would lead to further shortages of food and medicine for citizens in an already dire situation by taking away their primary source of income. The regime has, up until now, managed to honor its interest payments to foreign investors by sacrificing the importation of basic goods, food and medicines at the cost of its citizens.

On the 15^th November, the Venezuelan government signed a 10-year restructuring deal with Russia for just over $3 Billion, allowing minimal payments to be made to Russia over the next 6 years. Experts expect this deal to help the struggling nation in the short-term by reliving them of some payments, in the hopes this will free up some money to help develop its struggling economy. It is reported that this deal with Russia does not include any PDVSA debt as no corporate debt was covered in the deal.

A further blow has since hit the struggling nation as the ISDA committee has as of the 16^th of November ruled that the PDVSA has also defaulted on its debt, after the committee stated that a “failure to pay Credit Event” had occurred. This decision will result in the triggering of payments to investors through default insurance, but how this will be settled is to be decided in a meeting on Monday 20^th.

Venezuelan officials blame their financial crisis on financial sanctions imposed by the Trump administration. These sanctions were put in place due to accusations of human rights abuses by President Maduro, and the declaration by the US that the Venezuelan leader was a Dictator. These sanctions prevent US banks from trading and/or investing in any recently issued Venezuelan debt, with Maduro accusing the US of carrying out an ‘economic war’ against them with the imposition of these sanctions. These financial sanctions are particularly problematic as the buying of new Venezuelan bonds is a requirement for any debt resolution. This leaves Venezuela in a catch-22 situation. It must refinance its debt in the form of new bonds, and with 70% of current bond holders being from North America the inability to sell more bonds to the US makes the debt resolution process that much harder.

Despite Venezuela laying the brunt of the blame on the US, experts argue the blame should instead be put on the Venezuelan socialist regime that has been in power since 1999. In a desperate attempt to make goods more affordable to citizens the freezing of prices on goods in the country was imposed, alongside the fixing of the exchange rate for the Bolivar (Venezuela’s currency). This freezing of prices lead to large numbers of farmers going out of business which has had a huge part to play regarding the food shortages. Alongside this mismanagement by the government, the price of oil during this time was continuing to drop, leaving the oil rich and cash-poor country in economic and humanitarian crisis. With Venezuela boasting the largest global oil reserves, the country should, in theory, be a wealthy and prosperous nation. Instead its citizens are living through poverty after its Governments decision to prioritise its creditors over its own people, with the economic future of Venezuela remaining unclear.