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Venezuela has suffered what is expected to be the first in a cascade of defaults on more than $60bn of international bonds after missing several interest payments.
The country on Monday evening missed a deadline to make $200m in interest payments on two of its government bonds, spurring S&P to formally declare the first of what are expected to be many defaults. Caracas is already overdue on $420m of interest payments on other sovereign bonds, which will also soon be in default, as will payments on debt from PDVSA, the state oil company.
The oil-rich nation managed to service its debts for much longer than many investors had expected after the 2014 energy price collapse. But Nicolás Maduro, the president, finally admitted defeat two weeks ago, announcing the country would have to “refinance and restructure” all its foreign debts.
Including bilateral and other loans, these total more than $150bn, so a sovereign default would be one of the biggest in history. In 2012, Greece restructured more than €200bn, which remains the largest default on record.
Venezuelan bond prices had begun to recover from the fright of the default announcement on Tuesday but fell back to trade at cents on the dollar. A $2.5bn bond due in October next year — one of the bonds now in default — lost almost a fifth of its value to trade at 25.7 cents on the dollar.
Pressure is growing on the socialist government after investors left a Caracas meeting on Monday none the wiser about how it will surmount the financial challenges and the EU-imposed sanctions on Venezuela for human rights abuses.
Despite calls by some in Latin America for escalating sanctions to include travel bans and asset freezes, as well as an embargo on oil exports, Caracas has shown little concern over the international opprobrium.
Mr Maduro called the EU sanctions “stupid”. Tareck El Aissami, the vice-president, who is already under US sanctions for alleged drug trafficking and was the only government official to speak at Monday’s bondholder meeting, offered no concrete proposals for debt restructuring.
Instead, financiers were offered chocolates, those at the meeting said. “Crazy stuff,” said one emerging markets bond manager, who was briefed on the session but did not attend. “But [it] doesn’t surprise me.”
In an official release, the government described Monday’s debt talks as a “resounding success” and “very positive and auspicious”.
“It served to ratify our full intention to continuing complying with our commitments . . . despite the obstacles generated by the Trump administration and their Venezuelan political allies who seek to attack our country,” the statement said. “They have not achieved it, they will not achieve it. The positive climate in which this refinancing process began indicates that we will . . . continue to build the state of wellbeing that the people of Venezuela deserve.”
Caracas’ nonchalance may be tied to hopes that it will receive bailout aid from Russia that could help stave off an official declaration of default by ISDA, the derivatives association, following a late $1.1bn bond payment and skipped $47m interest payment last week. Venezuela and Russia are due to announce the terms of their $3bn bilateral debt restructuring on Wednesday.
Pavel Federov, the chief financial officer of Rosneft, the Kremlin-controlled oil company that has loaned $6bn to Venezuela, said on a conference call on Tuesday that “at this point in time, the company is not planning any further prepayments to Venezuela”.
There are also renewed hopes the government and opposition could reach a political settlement that would facilitate a financial rescue in internationally mediated talks, with another round of negotiations due to take place in the Dominican Republic this week.
Although the opposition is on the back foot after suffering losses in rigged elections, it still holds a powerful financial card. Any bond restructuring would require the issuance of fresh debt to swap for old bonds. But that new debt would be recognised internationally as legal only if approved by the opposition-dominated National Assembly. Mr Maduro has in effect usurped this democratically elected body by installing an all-powerful Constituent Assembly.
“The best thing would be if the government and the opposition reached a political accord that meant any debt restructuring could count on National Assembly approval,” suggested Francisco Rodriguez, an economist, in El Universal, a local newspaper.
Last week, the US said it would “consider” allowing US-regulated banks and institutions to deal in Venezuelan debt “if the democratically elected Venezuelan National Assembly approved a new debt issuance”.
The EU and Latin America’s biggest countries have also said they would only recognise National Assembly-approved legislation, including debt issuance.
Bond default could in theory save Mr Maduro $1.6bn in debt payments this year. But default could also see creditors seize Venezuelan oil cargos, worsening economic conditions in a country where citizens increasingly suffer from malnutrition and preventable diseases because they cannot find or afford food or medicine.
In that event, Russia could play a invaluable role by facilitating the shipment and trading of Venezuelan oil, so helping it avoid seizure. On Monday China, another Venezuelan ally and creditor, and Russia boycotted an informal UN Security Council meeting at which the US ambassador called Venezuela “an increasingly violent narco-state” that threatens the world.