Default Time: Venezuela Announces It Will Restructure All Debt After Tomorrow"s Final Payment

One week ago, we and many others wondered, if the time has finally come for Venezuela, which was facing a "no grace period" $842 million principal payment for bonds issued by state-run energy company PDVSA, to default on its billions of unrepayable obligations. As we reported then, the liquidity crisis for Venezuela was especially acute because even if it did make the first PDVSA payment, it was facing a second, even larger one today, when PDVSA had to make another $1.121BN payment.

Well, despite a several day transfer delay, Venezuela did make the first payment, however it was not clear if Caracas would also make today"s payment, although as Reuters reported earlier, "markets remained optimistic that President Nicolas Maduro’s government will make the payment, though investors expect delays. PDVSA last week struggled for days to deliver funds for a separate bond payment amid confusion over which banks were charged with transferring the money."

PDVSA bonds were down slightly in early trading on Thursday, while Venezuelan bonds were mixed, according to Thomson Reuters data.

However, as we previewed again last week, and as Reuters confirmed today, "most economists say a default is increasingly likely in the medium term as Venezuela’s collapsing socialist economic model has left the once-prosperous population destitute and led to deterioration of the OPEC nation’s vital oil industry."

It now appears that that is indeed the case, and the long overdue Venezuela default, which has been speculated ever since 2014, is finally nigh, because during a nationwide TV address, Venezuela"s socialist president Nicolas Maduro said the country will seek to restructure its global debt after the state-owned oil company makes the PDVSA payment due at midnight. Maduro blamed a financial blockade that is preventing the nation from rolling over its debt, according to Bloomberg.

“I decree a refinancing and restructuring of all foreign debt and all Venezuelan payments,” Maduro said. “We’re going to a complete reformatting. To find an equilibrium, and to cover the necessities of the country, the investments of the country.”

“We have had to face a real global financial persecution,” Maduro said, adding that OPEC member Venezuela had paid $71.7 billion in debt since he came to power in 2013, despite losing $100 billion in revenues to falling oil income. Too bad he didn"t blame the "speculators" for the collapse of his socialist paradise.

“If Venezuela wants to refinance one of its bonds, it is prohibited by the global financial dictatorship,” Maduro added according to Reuters, warning that “they will never suffocate us. We will never surrender to the U.S. empire,” he added, also criticizing Colombia for allegedly blocking a shipment of medicines under U.S. pressure.

The good news is that bondholders of the PDVSA bonds maturing Thursday will get paid in full: according to Maduro, the government will make the last $1.1 billion PDVSA principal payment due overnight. The bad news, is that everyone else is about to get a big, juicy haircut, or as Bloomberg reports, "from there on out, the nation will renegotiate its debt with banks and investors, he said in a national address."

Of course, since there is no such thing as a "unilateral restructuring" in the world of debt, and since the country has effectively previewed it will be haircutting its creditors few if any of whom will agree to Maduro"s terms, another way of putting what Maduro just said is that Venezuela is - finally  - about to default.

Now this is a problem for Venezuela"s creditors because, well, they are owed a lot of money.  In total, Venezuela has $143 billion in foreign debt owed by the government and state entities, with about $52 billion in bonds, according to Torino Capital, even as Venezuela"s international reserves - including the nation"s gold - have sunk to just $10 billion, a 15 year low. The table below shows only the upcoming coupon and maturity payments:

What is bizarre is that unlike most of its Latin American neighbors, during 18 years of socialist rule, Venezuela has always paid its foreign debt on time, including during the recent crippling economic crisis that has spurred widespread food shortages. Or rather had.

Maduro made the announcement in a televised address in which he emphasized that Venezuela has always honored its obligations, and had the money to continue doing so, but was being hampered in its efforts by the financial penalties the U.S. imposed this year for what it said were anti-democratic moves by his administration.

He may have a point:  In many ways the default was inevitable. Financial sanctions imposed by Donald Trump in August made it virtually impossible to raise money from many international investors, and led to a collapse in Venezuela oil exports. Those sanctions, which prohibit U.S.-regulated institutions form purchasing new bonds, will also limit the current regime from sitting down with U.S. investors to restructure its debt. It’s an unprecedented situation for bondholders, who have limited recourse to negotiate for payment as long as sanctions are in effect.

Vice President Tareck El Aissami - one of the individuals targeted in the sanctions - was named by Maduro as head of bond restructuring efforts. He will convene bondholders of all international debts owed by the sovereign and PDVSA. But wait, there"s more, because earlier this year, the Treasury Department alleged that the same El Aissami - who was elevated to vice president in January - protected drug lords and oversaw a network exporting thousands of kilograms of cocaine.

El Aissami spoke on TV, saying that the "refinancing", by which he probably means default, will allo Venezuela to invest in social functions, and added that Euroclear has blocked Venezuela"s payments.

Meanwhile, as a long-awaited Venezuela default is now reality, there are those - including economists such as Ricardo Hausmann - who will be delighted by the country"s aggressive move to impair its creditors, having urged the government to stop payments on its bonds. They say the debt load is unsustainable, and sending dollars to foreign investors while cutting back on imports of food, medicine and basic goods for the Venezuelan people is immoral. In the hyperinflationary banana republic case of Venezuela, they just may have a point.

Venezuelan bonds trade at an average price of 36 cents on the dollar due to widespread investor concern that the nation was headed for default. Benchmark bonds due in 2027 have plunged from about 50 cents on the dollar a year ago to 38.7 on Thursday.

As for whether or not Venezuela is about to default, from a purely technical CDS and ISDA standpoint, any distressed restructuring of debt - which is what is about to take place - is equivalent to a credit event. Which means all those who loaded up on CDS in the past three years are about to have a long-overdue payday.

Maduro Visits Putin, Proposes Global Oil Trade In Rubles, Yuan

Three weeks after the US imposed financial sanctions on Venezuela in an effort to cripple its economy and choke the Maduro regime, which in turn prompted Caracas to announce it would no longer receive or send payments in dollars, and that those who wished to trade Venezuelan crude would have to do so in Chinese Yuan, today during an energy summit held in Moscow, Venezuela"s president Nicolas Maduro proposed to expand his own personal blockade of the US, by proposing that all oil producing countries discuss creating a currency basket for trading crude and refined products. One which is no longer reliant on the (petro)dollar. 

“Developing a new mechanism of controlling the oil market is necessary,” Maduro said on Wednesday at the Russian Energy Forum, being held in Moscow this week.

Quoted by RT, Maduro also blamed trade in crude oil paper futures as having an adverse impact on the oil market, which has undermined attempts by OPEC to stabilize prices. To counteract such "speculation", Maduro proposed an alternative currency basket, one which is based not on the world"s reserve currency but includes the yuan, ruble, and other currencies, and which will mitigate the alleged adverse impact of futures trading.

 

Maduro"s proposal is merely the latest not so veiled hint at dedolarizing the global financial system by bypassing the petrodollar entirely, and rearranging a new currency basket determined by the world"s biggest oil producer, and largest oil importer.

Of course, Maduro is merely piggybacking on what China may already have in the works: recall that a month ago, the Nikkei Asian Review reported that China is preparing to launch a crude oil futures contract denominated in Chinese yuan and convertible into gold, potentially creating the most important Asian oil benchmark and allowing oil exporters to bypass U.S.-dollar denominated benchmarks by trading in yuan.

Maduro also insisted that Venezuela is dealing with its debt to Russia, currently in the billions, and that Rosneft"s deal with Venezuelan state oil producer PDVSA is “subject to negotiation.” “We fulfill all the obligations to Russia. If we get more favorable terms for restructuring the debt, this will be the result of a deal between the two governments,” said Maduro. It was unclear how Putin felt toward said proposal. 

Maduro also complained that US sanctions make it difficult to negotiate the debt issue with American debt holders (something the US is well aware of). In addition to switching to a Yuan-based basket...

... Caracas has been framing a plan to deliver its crude to alternative markets should the White House impose sanctions on trading the country"s oil, Maduro said in response to a question on the possibility of PDVSA"s default. “Venezuela has plans A, B, C, and others. There are other international companies interested in buying oil and refined products. We will create the best terms for them,” he said.

It remains to be seen if a last minute agreement by Russia and China to bailout Venezuela by revoking some or all of the petrodollar"s reserve currency privileges, is in store. Needless to say, such a development would be the biggest shock to the global monetary system since Nixon killed the gold standard.

Maduro To Generals: Prepare For War With "Criminal Empire" US

After barely managing to scrape together the nearly $200 million needed to make a bond payment earlier this month (the country made the payment a week late), Embattled Venezeulan President Nicolas Maduro is refocusing his attention on the US, warning military leaders Tuesday to begin preparing for war with the US. Maduro"s call to arms comes after the US has repeatedly tightened sanctions against Maduro"s regime and the country"s state-run oil company; earlier this week, the Trump administration blocked Venezeulan officials from entering the US as part of the White House"s new “targeted” travel ban. Trump has also repeatedly threatened a military intervention if Maduro doesn"t leave voluntarily.

Maduro is probably still brooding over Trump’s call for the world community to help restore “democracy and political freedoms” to Venezeula by ousting Maduro (to which Maduro reportedly responded in typical leftist fashion by comparing Trump to Hitler).  Trump made those remarks last week during his first address to the UN General Assembly. Earlier this year, Trump said he wouldn"t rule out a military option for dealing with Venezuela, adding that the US has an obligation to take of the country because it"s "our neighbor."

Maduro said Trump’s threats were the reason for him ordering the military to be on alert.

"We have been shamelessly threatened by the most criminal empire that ever existed and we have the obligation to prepare ourselves to guarantee peace," said Maduro, who wore a green uniform and a military hat as he spoke with his army top brass during a military exercise involving tanks and missiles. "We need to have rifles, missiles and well-oiled tanks at the ready....to defend every inch of the territory if needs be," he added.

Over the summer, the US announced sanctions to prevent PDVSA, Venezuela’s state-owed oil company, from issuing new debt (sanctions that conveniently avoided existing bonds held by Goldman Sachs), while also preventing Citgo, the US subsidiary of PDVSA, from repatriating dividends. The US has also passed sanctions against many top Venezuelan officials. Tensions between Maduro and Trump started escalating shortly after Trump’s inauguration, when the US blacklisted Venezuelan Vice President Tareck El Aissami for drug trafficking.

Maduro referenced the sanctions during his speech at the military base. As he spoke, Russian military planes flew in the sky as part of the training exercise, according to Newsweek.

"The future of humanity cannot be the world of illegal sanctions, of economic persecution," Maduro said.

Of course, Maduro doesn"t have the manpower to stand up to the US’s much-larger military. The embattled leader has managed to cling to power in Venezuela despite mounting political and economic crises that have inspired months of deadly anti-government demonstrations in the streets of the capital, Caracas and many other cities around the country.

As Newsweek reports, Defense Minister Vladimir Padrino has backed Maduro through the unrest, but Reuters reported back in August that there may be growing support for a military-backed coup against Maduro, whose approval rating remains at all-time lows, even as he has succeeded in consolidating power and marginalizing his opposition.

The country has managed to avoid financial calamity with the help of Russia and China. However, Newsweek reports that China is beginning to limit its exposure to Venezuela amid the mounting political unrest.
 

Dark Humor From Socialist Hellhole Venezuela

Authored by Daniel Mitchell via The Foundation for Economic Education,

Back in 2015, I mocked Venezuelan socialism because it led to shortages of just about every product. Including toilet paper.

But maybe that doesn’t matter. After all, if people don’t have anything to eat, they probably don’t have much need to visit the bathroom.

The Washington Post reports that farmers are producing less and less food because of government intervention, even though the nation is filled with hungry people.

Venezuela, whose economy operates on its own special plane of dysfunction. At a time of empty supermarkets and spreading hunger, the country’s farms are producing less and less, not more, making the caloric deficit even worse. Drive around the countryside outside the capital, Caracas, and there’s everything a farmer needs: fertile land, water, sunshine and gasoline at 4 cents a gallon, cheapest in the world. Yet somehow families here are just as scrawny-looking as the city-dwelling Venezuelans waiting in bread lines or picking through garbage for scraps.

 …“Last year I had 200,000 hens,” said Saulo Escobar, who runs a poultry and hog farm here in the state of Aragua, an hour outside Caracas. “Now I have 70,000.” Several of his cavernous henhouses sit empty because, Escobar said, he can’t afford to buy more chicks or feed. Government price controls have made his business unprofitable…the country is facing a dietary calamity. With medicines scarce and malnutrition cases soaring, more than 11,000 babies died last year, sending the infant mortality rate up 30 percent, according to Venezuela’s Health Ministry.

…Child hunger in parts of Venezuela is a “humanitarian crisis,” according to a new report by the Catholic relief organization Caritas, which found 11.4 percent of children under age 5 suffering from moderate to severe malnutrition… In a recent survey of 6,500 Venezuelan families by the country’s leading universities, three-quarters of adults said they lost weight in 2016 — an average of 19 pounds. This collective emaciation is referred to dryly here as “the Maduro diet,” but it’s a level of hunger almost unheard-of… Venezuela’s disaster is man-made, economists point out — the result of farm nationalizations, currency distortions and a government takeover of food distribution. …The price controls have become a powerful disincentive in rural Venezuela. “There are no profits, so we produce at a loss,” said one dairy farmer.

Here’s where we get to the economics lesson. When producers aren’t allowed to profit, they don’t produce.

And when we’re looking at the production of food, that means hungry people.

Even the left-wing Guardian in the U.K. has noticed.

Hunger is gnawing at Venezuela, where a government that claims to rule for the poorest has left most of its 31 million people short of food, many desperately so.

…Adriana Velásquez gets ready for work, heading out into an uncertain darkness as she has done since hunger forced her into the only job she could find at 14. She was introduced to her brothel madam by a friend more than two years ago after her mother, a single parent, was fired and the two ran out of food. “It was really hard, but we were going to bed without eating,” said the teenager, whose name has been changed to protect her.

…Venezuela’s crisis has deepened, the number of women working at the brothel has doubled, and their ages have dropped. “I was the youngest when I started. Now there are girls who are 12 or 13. Almost all of us are there because of the crisis, because of hunger.” She earns 400,000 bolivares a month, around four times the minimum wage, but at a time of hyperinflation that is now worth about $30, barely enough to feed herself, her mother and a new baby brother.

This is truly sad.

Our leftist friends like to concoct far-fetched theories of how prostitution is enabled by everything from low taxes to global warming.

In the real world, however, socialism drives teenage girls (or even younger) to work in brothels.

That’s such a depressing thought that let’s shift the topic back to hunger and toilet paper.

Especially since Venezuela’s dictator is bragging that the nation’s toilet paper shortage has been solved!

This is definitely a dark version of satire.

But Venezuela is such a mess that it’s hard to know where to draw the line between mockery and reality.

For instance, here’s another “benefit” of limited food. If you don’t eat, it’s not as necessary to brush your teeth.

And in the socialist paradise of Venezuela, that makes a virtue out of necessity since – surprise – there’s a shortage of toothpaste.

The Washington Post has the grim details.

Ana Margarita Rangel…spends everything she earns to fend off hunger. Her shoes are tattered and torn, but she cannot afford new ones. A tube of toothpaste costs half a week’s wages.

“I’ve always loved brushing my teeth before going to sleep I mean, that’s the rule, right?” said Rangel, …“Now I have to choose,” she said. “So I do it only in the mornings.” …The government sets price caps on some basic food items, such as pasta, rice and flour.

…those items can usually be obtained only by standing in lines for hours or by signing up to receive a subsidized monthly grocery box from the government… Since 2014, the proportion of Venezuelan families in poverty has soared from 48 percent to 82 percent…

Fifty-two percent of families live in extreme poverty, according to the survey, and about 31 percent survive on two meals per day at most.

Isn’t socialism wonderful! You have the luxury of choosing between two meals a day, or one meal a day plus toothpaste!

By the way, the central planners have a plan.

Though it won’t make Bugs Bunny happy.

Rabbit is now on the menu! Here are some excerpts from a CNN report.

Let them eat rabbits. That was basically the message from President Nicolas Maduro to Venezuelans starving and struggling through severe food shortages… 

 

The Venezuelan leaders…recommend that people raise rabbits at home as a source of food.

 

…The agriculture minister argued that rabbits easily reproduce and are a source of protein. He also recommended citizens consider raising and growing other animals and vegetables at home. It’s just the latest attempt to try and solve the food shortage problem. The government forces citizens to pick up groceries on certain days of the week depending on social security numbers.

Gee, isn’t this wonderful. The government cripples markets so they can’t function and then advocates people live like medieval peasants.

Maybe there should be price controls on clothing, along with having the government in charge of distribution. That will wreck that market as well, so people can make their own clothes out of rabbit pelts.

I wonder whether a certain American lawmaker is rethinking his praise of Venezuelan economic policy?

Based on what he said as recently as last year, the answer is no.

Venezuelan Women Forced To Turn To Prostitution To Afford Food

Authored by Mac Slavo via SHTFplan.com,

All twelve women who work at the “Show Malilo Night Club” brothel in Arauca, Colombia are from Venezuela. As Venezuela’s socialist economic crisis continues, many Venezuelan women have turned to the sex trade in neighboring Colombia to eat and provide for their families.

“We’ve got lots of teachers, some doctors, many professional women and one petroleum engineer,” brothel owner Gabriel Sánchez said of the women who sell their bodies for $25 an hour.  “All of them showed up with their degrees in hand.” 

Sanchez who is 60 years-old, started the brothel in Arauca, Colombia after he lost his job in a car repair shop in Venezuela thanks to the government’s socialist policies.

Sánchez and others in the sex industry say Venezuelans dominate the trade now because they’re willing to work for less pay.

“I would say 99 percent of the prostitutes in this town are Venezuelan,” he said. 

Amid food shortages, hyperinflation, rampant poverty driven by socialism, and U.S. sanctions, waves of economic refugees have fled the country. Those with the means to do so have gone to places like Miami, Santiago, and Panama. But those who are less fortunate, have had to sink low to simply eat.

A recent study suggested as many as 350,000 Venezuelans had entered Colombia in the last six years. With jobs scarce in the country though, many young (and some not so young) women are turning to the world’s oldest profession to make ends meet. According to the Miami Herald, prostituting for money to buy basic necessities has become commonplace for Venezuelan women.

“If you had told me four years ago that I would be here, doing this, I wouldn’t have believed you,” said Dayana, who asked that her last name not be used.

“But we’ve gone from crisis to crisis to crisis, and now look where we are.”

Dayana is a 30-year-old mother of four who found herself struggling to feed her family in Caracas.  Seven months ago, she came to Colombia looking for work. Without an employment permit, she found herself working as a prostitute in the capital, Bogotá.  Dayana said she used to be the manager of a food-processing plant on the outskirts of Caracas, but that job disappeared after the government seized the factory and “looted it,” she said.

With inflation running in excess of 700 percent and the bolivar currency in free fall, finding food and medicine in Venezuela has become a frustrating, time-consuming task. Dayana said she often would spend four to six hours waiting in line hoping to buy a bag of flour. Other times she was forced to buy food on the black market at exorbitant rates. Hunger in Venezuela is rampant. –The Miami Herald

Many in Venezuela didn’t prepare for the certain economic failure and food shortages that inevitably result from socialism. As The Prepper’s Blueprint says “If we have learned one thing studying the history of disasters, it is this: those who are prepared have a better chance at survival than those who are not. A crisis rarely stops with a triggering event. The aftermath can spiral, having the capacity to cripple our normal ways of life.” And Venezuela is in the midst of such a crisis.  This is made evident by the seeking of prostitution jobs by previously successful and professional women.

Dayana claims she can make between $50-$100 per night by selling herself for 20 minutes at a time.

 “Prostitution obviously isn’t a good job,” she said.

“But I’m thankful for it because it’s allowing me to buy food and support my family.”

There seems to be no end in sight for Venezuela’s economic pain either.  And President Nicolás Maduro has been digging in and avoiding the economic reforms that economists say are necessary.

From Richer To Poorer: Venezuela's Economic Tragedy Visualized

From the 10 years of military dictatorship between 1948-1958 to the impeachment of Carlos Andrés Pérez for corruption in 1993, The Money Project"s Jeff Desjardins notes that Venezuelan politics have often been both rocky and eventful.

But despite these challenges throughout its history, no one has ever denied Venezuela’s economic potential. After the discovery of oil in the early 20th century, the nation quickly built its economy on back of black gold – and even today, Venezuela leads the world in proven oil reserves with 300 billion barrels.

Early on, Venezuela’s oil was a game-changer.

By 1950, as the rest of the world was struggling to recover from World War II, Venezuela had the fourth-richest GDP per capita on Earth. The country was 2x richer than Chile, 4x richer than Japan, and 12x richer than China!

Unfortunately for Venezuela, this wealth wouldn’t last – and an over-reliance on oil would soon decimate the economy in unexpected ways.

The Downfall of Venezuela’s Economy

From 1950 to the early 1980s, the Venezuelan economy experienced steady growth.

By 1982, Venezuela was still the richest major economy in Latin America. The country used its vast oil wealth to pay for social programs, including health care, education, transport, and food subsidies. Workers in Venezuela were among the highest paid in the region.

However, as you’ll see in the following animation, from there things went quickly downhill. In the mid-1980s, an oil glut and a free-falling oil price ended up decimating the Venezuelan economy, which was unable to diversify away from energy.

Today, Venezuela has one of the poorest major economies in Latin America – and as the current crisis rides itself out, the IMF foresees it getting far worse. By 2022, the organization predicts Venezuela’s GDP per capita (PPP) will be just $12,210, which would be a massive economic setback – the Venezuelan economy would be even poorer than it was many years before the Chávez era started.

Flying Too Close to the Sun

Although oil revenues are tempting to rely on to maintain social order, they come with a degree of unpredictability. According to OPEC, Venezuela still relies on oil for 95% of its exports, which means that any fluctuations in oil price can be the difference between immense wealth and near-poverty.

The above graphic shows Venezuela’s oil revenues (in 2000 dollars) against the rate of inflation – and it symbolizes the story of Venezuela’s recent economic history as succinctly as possible.

After the oil glut in the 1980s, Venezuela’s oil revenues dropped significantly. It was then that Venezuela had its first bout with inflation, where rates peaked in 1989 (84.5% inflation) and later in 1996 (99.9% inflation). Without sufficient money coming in, the country had to rely on its printing presses in an attempt to maintain living standards.

In 1998, Hugo Chávez was elected with the promise that Venezuela could reduce poverty and step up living standards by leaning even more heavily on its energy wealth. The recovery of oil prices helped this come true in the 2000s, and Chávez later passed away in office in 2013.

A Temporary Fix

Nicolás Maduro, who took over after the death of his predecessor, saw oil prices crash almost immediately, and it was clear that Venezuela’s intense battle with inflation was only just beginning. The national currency, the Venezuelan bolívar, would soon be almost worthless.

The details of today’s crisis and intense hyperinflation are widely shared.

The country has massive shortages of food, electricity, and other essential goods, and violence is escalating in Caracas. More recently, the government is attempting to tighten its grip around power, and mismanagement of the economy has led to people starving on the streets. People are calling the situation a humanitarian crisis, which is extremely disheartening to see in what was once one of the richest countries on the planet.

And while the current condition of Venezuela is a tragedy in itself, the country’s inability to live up to its true economic potential is nearly just as devastating.

*  *  *

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

Venezuela Headed For "Messiest Debt-Restructuring In History" Thanks To US Sanctions

After being effectively shut out from global financial markets – a situation that was made more precarious by US sanctions prohibiting purchases of Venezuelan debt (unless you’re buying them off Goldman Sachs, should the bank’s asset-management arm desire to liquidate its $3 billion “hunger bond” position) – Venezuela is drawing ever-nearer to what the Financial Times describes as potentially the “messiest debt restructuring in history.”

So far, Venezuela has managed to forestall a default by stripping assets from its state-owned oil company, Petroleos de Venezuela, commonly referred to as PVDSA, and shaking down local institutions of spare dollars – not to mention the explicit financial support of China and Russia. Recently, Rosneft, the largest Russian oil company, helped support its troubled ally, which enjoys the largest crude reserves in the world, by offering billions of dollars in advance payments for future crude supplies. Thanks to a deal brokered by deceased former President Hugo Chavez, Venezuela has for years been Rosneft’s largest foreign supplier of crude. Last year, the oil giant accepted a 49.9% stake in PVDSA’s US-based subsidiary, Citgo, as collateral for a $1.5 billion loan.

Venezuelan President Nicolas Maduro

However, thanks to the US sanctions, which prohibit purchases of newly issued debt and existing bonds that have so far not been sold outside of Caracas, the country will once again need to innovate or risk sliding into bankruptcy. Making matters all the more urgent, the country recently suffered a loss in US courts after a judge ruled that Canadian miner Crystallex can seize Venezuelan money held in a custody account at Bank of New York Mellon to cover a $1.4 billion judgment awarded by a World Bank tribunal.

Crystallex’s victory could further embolden the country’s creditors, who collectively may be owed as much as $3.7 billion.

“Venezuela has been taken to the World Bank’s ICSID tribunal 43 times. Only Argentina has been subjected to more claims. Of these 24 are still pending, including claims from Anglo American, ConocoPhillips, Air Canada and Vestey. The Eurasia Group estimates that Venezuela owes a total of $3.7bn as a result of ICSID rulings, and Crystallex’s progress is likely to embolden other creditors.”

Adding to the country’s troubles, a major US clearing house has said it will stop settling some Venezuelan bonds, and Cantor Fitzgerald has stopped trading them altogether.

After months of rhetoric, the US – which for years maintained an uneasy business relationship with Venezuela, formerly South America’s wealthiest economy – has severed the country’s last tenuous ties to the global financial system…

“The message is that the US doesn’t want its financial system enabling the Venezuelan government in any way,” says Charles Blitzer, of Blitzer Consulting, who is a former International Monetary Fund official.  

…And with the Crystallex ruling compounding the country’s troubles, its government is being set up for a “slow burn” leading ultimately to financial insolvency as creditors root out and seize whatever foreign assets they can find.

“Crystallex is the camel’s toe under the tent,” says Mark Weidemaier, a law professor at the University of North Carolina. “It will be a slow burn, but I wouldn’t be surprised to see people use the courts to ferret out where Venezuela’s assets are . . . and break down the barriers between the government, PDVSA and other entities.”

Typically, in a sovereign bankruptcy, creditors negotiate some kind of debt relief and trade their old, defaulted bonds for less valuable new ones. However, US sanctions may preclude this as an option for Venezuela, as the FT explains.

“…such a debt exchange would fall foul of the US sanctions regime, precluding any US banks from arranging one and any US bondholders from tendering their debts. In practice, it would mean indefinite financial purgatory for Venezuela until the US administration decides to lift the prohibition.

“If these sanctions stay in place, then Venezuela cannot restructure and it goes into limbo,” says Edward Al-Hussainy, a senior analyst at Columbia Threadneedle."

Since Venezuela’s economic crisis began four years ago, imports have fallen precipitously, leading to dire shortages of essentials like medicine and foodstuffs as the country"s currency depreciated to the point of worthlessness. Unless the country can find some way to circumvent the sanctions, it will be forced to decide between countenancing further import declines, or a disorderly default.

According to Torino Capital, a Latin American-focused investment bank, Venezuela could choose the latter.

“Torino Capital…argued that this might counter-intuitively make a restructuring less likely. ‘It is possible that, faced with this choice, Venezuelan authorities end up deciding that the negative effects of a disorderly default on PDVSA’s capacity to generate export revenue are worse than the contractionary effects of further import cuts,’ the bank wrote in a note to clients.”

To be sure, a default could still be years away. And investors, for one, aren’t worried. The country’s debt has been largely unperturbed by the recent developments: PDVSA bonds have largely traded sideways, despite the recent developments.

“In the near term the impact will probably be minimal. Given Venezuela’s messy finances, the country is in practice already shut out of the international bond market. And while Crystallex won a legal skirmish, it is far from winning the war. It is unclear how much money Venezuela holds at BNYM and it may still be protected by sovereign immunity. Underscoring the investor view that little has changed, Venezuela and PDVA’s bonds have largely traded sideways.”

Still, a default, whenever it arrives, could signal the last gasp of the country’s embattled government. The country"s foreign reserves have already fallen below $10 billion (though they received a boost following the Goldman deal...).

“If they default, they will be out of government within three months,” says Federico Kaune, head of emerging market debt at UBS Asset Management. “The calculation is that they’re either in government, in exile or jail.”

With the fate of the Maduro regime hanging in the balance, we imagine Washington will do everything in its power to force Venezuela into bankruptcy, allowing the US to claim victory over yet another foreign adversary.
 

US Bans Dealing In Venezuelan Government Debt And New State-Owned Oil Company Debt & Equity

President Trump just signed an executive order deepening the sanctions on Venezuela, confirming the rumors of a ban on trading in Venezuelan debt that sent VENZ/PDVSA bonds tumbling.

As we noted previously, on Tuesday evening, the WSJ reported that the U.S. government is considering "restricting trades in Venezuelan debt as it seeks to punish President Nicolás Maduro for undermining the country’s democracy" and that "the unprecedented move would temporarily ban U.S.-regulated financial institutions from buying and selling dollar-denominated bonds issued by the Republic of Venezuela and state oil company Petróleos de Venezuela SA, according to a person who was briefed on the proposal."

One option being considered is banning the trading in just some papers issued by the state oil company to limit its access to external funds, said a third person.

The ban would be the first step against the Venezuelan financial system since Mr. Trump promised “swift economic action” against Mr. Maduro for installing a parallel parliament staffed with loyalists earlier this month.

The sanctions ban dealing in any new debt (or equity) issue by PDVSA and all Venezuelan government debt.

From Treasury:

All transactions related to, provision of financing for, and other dealings in the following by a United States person or within the United States are prohibited:

(i) new debt with a maturity of greater than 90 days of Petroleos de Venezuela, S.A. (PdVSA);
(ii) new debt with a maturity of greater than 30 days, or new equity, of the Government of Venezuela, other than debt of PdVSA covered by subsection (a)(i) of this section;
(iii) bonds issued by the Government of Venezuela prior to the effective date of this order;
(iv) dividend payments or other distributions of profits to the Government of Venezuela from any entity owned or controlled, directly or indirectly, by the Government of Venezuela.

Statement by the Press Secretary on New Financial Sanctions on Venezuela

President Donald J. Trump has signed an Executive Order imposing strong, new financial sanctions on the dictatorship in Venezuela.

The Maduro dictatorship continues to deprive the Venezuelan people of food and medicine, imprison the democratically-elected opposition, and violently suppress freedom of speech. The regime"s decision to create an illegitimate Constituent Assembly —and most recently to have that body usurp the powers of the democratically-elected National Assembly—represents a fundamental break in Venezuela"s legitimate constitutional order.

In an effort to preserve itself, the Madura dictatorship rewards and enriches corrupt officials in the government"s security apparatus by burdening future generations of Venezuelans with massively expensive debts. Maduro"s economic mismanagement and rampant plundering of his nation"s assets have taken Venezuela ever closer to default. His officials are now resorting to opaque financing schemes and liquidating the country"s assets at fire sale prices.

As Vice President Mike Pence has said, in Venezuela, "we"re seeing the tragedy of tyranny play out before our eyes." No free people has ever chosen to walk the path from prosperity to poverty. No free people has ever chosen to turn what was once, and should still be, one of South America"s richest nations into its poorest and most corrupt.
and most corrupt.

We will not stand by as Venezuela crumbles. The President"s new action prohibits dealings in new debt and equity issued by the government of Venezuela and its state oil company. It also prohibits dealings in certain existing bonds owned by the Venezuelan public sector, as well as dividend payments to the government of Venezuela.

To mitigate harm to the American and Venezuelan people, the Treasury Department is issuing general licenses that allow for transactions that would otherwise be prohibited by the Executive Order. These include provisions allowing for a 30-day wind-down period; financing for most commercial trade, including the export and import of petroleum; transactions only involving Citgo; dealings in select existing Venezuelan debts; and the financing for humanitarian goods to Venezuela.

These measures are carefully calibrated to deny the Maduro dictatorship a critical source of financing to maintain its illegitimate rule, protect the United States financial system from complicity in Venezuela"s corruption and in the impoverishment of the Venezuelan people, and allow for humanitarian assistance.

The United States is not alone in condemning the Maduro regime. Through the Lima Declaration of August 8, our friends and partners in the region refused to recognize the illegitimate Constituent Assembly or the laws it adopts. The new United States financial sanctions support this regional posture of economically isolating the Madura dictatorship.

The United States reiterates our call that Venezuela restore democracy, hold free and fair elections, release all political prisoners immediately and unconditionally, and end the repression of the Venezuelan people. We continue to stand with the people of Venezuela during these trying times.

Of course this will just add fuel to Maduro"s fire talk about America waging economic war against the Latin American nation (as opposed to the utter collapse of the country being due to decades of Bernie Sanders-style socialism).

As we noted previously, Maduro is afraid what would happen to PDVSA assets once the country defaults (not to mention to the army"s support of his regime, which has been solid as long as the money keeps flowing):

Most analysts and investors believe that this is because the government wants to keep the oil flowing. PdVSA is responsible for half of Venezuela’s fiscal income and some 90% of its exports, according to Standard & Poor’s.  For some analysts, Venezuela’s fear is that a debt default would push investors to try to seize PdVSA’s foreign assets.

Mr. Dehn has another theory over what is behind that fear: that PdVSA’s so-called joint venture partners, such as Russia’s Rosneft and China, would pull lines of credit if the country defaulted. That would starve it of working capital and prevent it from producing oil.

“If he stops [servicing the debt]…oil production will stop. The government will fall,” said Mr. Dehn.

The decision to block trading of Venezuela bonds could well be the tipping point that forces creditors to finally give up on the Caracas regime, leading to a prompt default and the fall of Maduro, in the process Washington will once again have succeeded in toppling a foreign regime, this time without firing a single shot.

Venezuela Bonds Tumble On Report U.S. To Ban Trading

Venezuela bonds are tumbling after the WSJ reported that the US government was considering a ban on trading in the country"s debt. PDVSA’s 12.75% 2022s were trading at 44.75 this morning,down from around 45.65 at Tuesday"s close and two points weaker than levels seen earlier in the week, according to MarketAxess. Bond traders also sold PDVSA"s 6% 2026s, which had fallen about a point to 30.00.

On Tuesday evening, the WSJ reported that the U.S. government is considering "restricting trades in Venezuelan debt as it seeks to punish President Nicolás Maduro for undermining the country’s democracy" and that "the unprecedented move would temporarily ban U.S.-regulated financial institutions from buying and selling dollar-denominated bonds issued by the Republic of Venezuela and state oil company Petróleos de Venezuela SA, according to a person who was briefed on the proposal."

One option being considered is banning the trading in just some papers issued by the state oil company to limit its access to external funds, said a third person. The ban would be the first step against the Venezuelan financial system since Mr. Trump promised “swift economic action” against Mr. Maduro for installing a parallel parliament staffed with loyalists earlier this month.

Then again, Trump may not have to lift a finger to accelerate Venezuela"s default. As reported last week, following the recent sanctions against Maduro"s socialist paradise, foreign banks are shutting out Venezuelan companies and are refusing to provide the country"s oil tankers with the letters of credit they need to offload oil, and replace it for one commodity most needed in Venezuela: hard dollars.  As a result, the decline in PDVSA"s (and Venezuela"s) dollar reserves is accelerating with every day, a pace which roughly tracks the recent plungein Venezuela bonds.

Or not.

Not everyone is convinced that Venezuela is facing an imminent default. In a separate report, the WSJ writes that one large holder of Venezuelan debt, Ashmore Group PLC, thinks investors have come to the wrong conclusion.

Mr. Maduro’s political power “has just increased dramatically,” said Jan Dehn, head of research at the emerging-market fund, which has $56 billion under management. The July vote, which was widely seen as fraudulent, convened a powerful new assembly aligned with Mr. Maduro that will be able to override other institutions and redraft the constitution.

Mr. Maduro’s administration has prioritized paying bondholders, even as the wider economy has shrunk, sparking widespread unrest and food shortages. As long as he retains a tight grip on power, that is unlikely to change, Mr. Dehn believes.

According to Dehn, Maduro’s political strength is one of three factors that should mean the country “can continue to service the debt indefinitely.” The other two are that oil remains above $40 a barrel and that state-owned oil company Petróleos de Venezuela SA, PdVSA, retains access to working capital.

Additionally, Maduro is afraid what would happen to PDVSA assets once the country defaults (not to mention to the army"s support of his regime, which has been solid as long as the money keeps flowing):

Most analysts and investors believe that this is because the government wants to keep the oil flowing. PdVSA is responsible for half of Venezuela’s fiscal income and some 90% of its exports, according to Standard & Poor’s.  For some analysts, Venezuela’s fear is that a debt default would push investors to try to seize PdVSA’s foreign assets.

Mr. Dehn has another theory over what is behind that fear: that PdVSA’s so-called joint venture partners, such as Russia’s Rosneft and China, would pull lines of credit if the country defaulted. That would starve it of working capital and prevent it from producing oil.

“If he stops [servicing the debt]…oil production will stop. The government will fall,” said Mr. Dehn.

In thie case, one can imagine why Maduro would do everything in his power to delay default until the bitter end, both for creditors and his administration, which has so far had the support of the army but will promptly lose it once the cash flow tries up. That"s also why many Venezuelan bonds rebounded since the Constitutional Assembly vote.

However, if the Journal is corect and the US is about to block trading of Venezuela bonds, that could well be the tipping point that forces creditors to finally give up on the Caracas regime, leading to a prompt default and the fall of Maduro, in the process Washington will once again have succeeded in toppling a foreign regime, this time without firing a single shot.