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Petróleos de Venezuela is the oily lifeblood of the country which owns it, so default should spell the beginning of the end for creditors. PDVSA’s exports are the only reason the government has been able to meet foreign debt repayments. After four years of recession and shortages of everything its citizens need, Venezuela has finally run out of road.
Well, almost. Last week, the government was deemed in default by credit rating companies, following a delay in bond payments. At this, the market barely moved — but then who cares what rating agencies think. More important was a ruling by the International Swaps and Derivatives Association that a “credit event” has occurred, one that will trigger insurance-like credit default swaps on the bonds of Venezuela and PDVSA.
Yet the credit event itself is not an endpoint. The value of derivative contracts that investors hold is small compared with the bonds — about $250m on PDVSA credit and $1.3bn on Venezuelan. This compares with $60bn of Venezuela and PDVSA outstanding bonds, out of an estimated total of more than $90bn in foreign debt. Investors can organise themselves to declare a full-blown default in the bonds where payments were delayed, in which they would (fruitlessly) demand accelerated repayment.
In the normal run of things when a country is unable to meet its payments, creditors would negotiate a restructure — accepting a haircut or delay in repayments.
But this is Venezuela. Creditors who did turn up to a meeting in Caracas to discuss the situation left with chocolate goody bags, but no clear plan.
A deal made with President Nicolás Maduro would likely ease political pressure on him — perpetuating dysfunction. If it does not, it might not be honoured by any successor. Besides, US banks cannot take part in any restructuring or purchase of new debt due to sanctions.
A further problem arises if bondholders declare default on the bonds at issue, as cross-default clauses would likely trigger default across the capital structure. With few reserves, the country would be unable to make payments. Creditors could try to seize assets, but PDVSA’s foreign assets are worth a fraction of the $120bn or so at stake.
Venezuela is still trying to pay. In fact PDVSA has paid — albeit late. Creditors should hold tight.
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