The Coming Mess With Venezuela’s Debt

Venezuela debt

Many people consider sovereign debt to be as much about debt as it is about politics. The sovereign entity has obligations to people that live there, and some of these obligations will end up being more compelling than the obligations from a loan agreement or from a bond indenture. This means that the analogy to personal bankruptcy or even corporate bankruptcy will only get people so far.

It appears that Venezuela is going to illustrate this. It has a debt stock that is around $125 billion. A quarter of that is due within the next few years, and this year alone, a payment of $10 billion is due.

The price of oil is down by a lot, which is unfortunate for the country because it depends on oil to raise funds from external sources. Some people believe that the country is not going to raise a lot from oil sales this year. In fact, some estimate they will only raise around $20 billion from oil sales.

The country will continue to struggle with balancing its budget because half of that amount has already been pledged to bondholders. Even when oil was being sold at $100 a barrel, the budget was not balanced. To put it mildly, inflation is very high in the country and it has been dealing with financial issues.

Luis Salas, the country’s minister of economy, said that the country was in an economic state of emergency. This was due to the decrease in oil price and the crisis back at home. Furthermore, it’s worth pointing out that recently spread on the country’s default swaps were trading above 6,200 basis points. This was compared to around 19 basis points for America, as well as the 1,100 basis points for Greece, and this is why it’s no secret as to why the country’s debt is trading at a huge discount.

Can the country buy itself some time? A good start would be a workout with creditors, but this would be faced with various challenges, with one being that the debt has been issued by the oil company and the country. This means there could potentially be disputes among inter-creditors. They may argue who should get paid first and and who should suffer the most if and when the debt is restructured.

Also, it has been reported that collection action clauses is not contained in the outstanding debt. These types of clauses are designed to avoid the holdout problem that Argentina has experienced, and it does this by binding all of the bondholders to a deal that was agreed upon by a majority of bondholders. Since Venezuela lacks these clauses when it comes to their debt, any workout could end up being sideswiped by litigation in the state of New York.

This may make bondholders a little nervous about working with the country, as some may not want to simply get a “haircut” while another bondholder will get much more via litigation. Not only that, but there are Venezuelan-owned assets located outside the country and this may make litigation a more attractive option. At least when compared to what happened in Argentina.

Finally, Venezuela is faced with political issues, as it is a split country. The legislature and the president are from two different parties. This means that everyone would have to work together if there was going to be a deal with bondholders, and this is probably not going to happen. This also means that a mess could be heading our way.

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