On November 2nd the president, Nicolás Maduro, announced the creation of a "presidential commission" to restructure Venezuelan external debt.
Analysis
Mr Maduro announced the planned restructuring at the same time that he announced the payment of US$1.1bn in principal due on bonds issued by PDVSA, the state-owned oil firm. He stated this would be the last payment made before restructuring. We estimate sovereign and PDVSA debt at US$105.5bn at end-2017.
The government appears finally to have accepted the reality that it cannot afford to pay its debts amid a deep economic crisis of its own making. Financial stresses have been escalating in recent weeks, causing the government and PDVSA to miss US$826m in repayments that have a 30-day grace period—presumably to allow it to meet other obligations that do not have a grace period.
Mr Maduro gave few details other than appointing the vice-president, Tareck El Aissami, as head of the commission. The hopes for a successful renegotiation are low: sanctions imposed by the US in August means that operations similar to a 2016 restructuring or a May deal in which a US bank purchased US$2.8bn in bonds would be difficult to undertake.
Sanctions complicate restructuring in other ways too, making it hard to convince an international investment bank to help with negotiations and making it all but impossible that creditors will be willing to deal with Mr El Aissami, who has been sanctioned by the US under charges of aiding drug‑trafficking. This is all on top of the more fundamental problem that the government does not have a credible macroeconomic programme to reassure creditors that it can return the public finances, the balance of payments, the currency or economic activity to a more sustainable position.
It is unclear as yet whether the government plans to restructure just sovereign debt or its PDVSA obligations as well. Its actions to date suggest that it is keen to avoid default on PDVSA bonds in particular, because of the risk of asset seizure. Regardless, creditors will undoubtedly push for a US court ruling allowing PDVSA to be considered the "alter ego" of the government, in order to seize PDVSA assets in the event of sovereign default.
Impact on the forecast
We had pencilled in a default into our forecasts for 2018; recent events confirm that this is likely, although there is a strong risk that default will in fact happen by the end of this year.
By: Financial markets and instruments (The Economist Intelligence Unit).
Photo: Telesur TV.
Review: Emerging Market Formulations & Research Unit, Flagship Records.