Is A Venezuelan Default Inevitable?
Bondholders, creditors, and any company with operations in Venezuela are all agog for news from Caracas after President Nicolas Maduro announced Venezuela will look to restructure its US$89 billion worth of debt to be able to continue servicing it.
Forecasts about what will happen next are all pessimistic, and that’s no wonder. By the end of next year, the government and state-owned PDVSA must repay debt obligations to the tune of US$13 billion, and foreign currency reserves are less than that already, at US$10 billion. What’s more, the country is subject to economic sanctions from the United States, which prohibit any U.S. entities from taking part in any business dealings with Venezuela, including debt restructuring.
It is these sanctions that many analysts view as the main reason for an unavoidable default. As Bloomberg author Katia Porzecanski wrote in a recent overview of the Venezuela situation, lack of access to U.S.-based banks and investment companies will make the debt restructuring initiative very difficult if not impossible, as debt restructuring almost invariably involves new debt issuance.
Some observers believe a default might be the lesser evil for Venezuela: imports are at multi-year lows and the population is suffering from shortages in basic goods including food and medicine. The government could stop servicing its debt and use what money remains in the state coffers to tackle the shortages.
A default, however, is in nobody’s favor, which makes the situation extremely complicated. Bondholders are just fine with payments coming in, even if they are late, as the bonds carry a quite attractive coupon. What they are not fine with is the possibility of a default followed by fights about the order of repayment of the various debts.
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