President Maduro announces what could be the beginning of a debt crisis for Venezuela

Posted on November 12, 2017

Analysts have been warning investors for years about the high probability of a Venezuelan default, as the country’s economy has been suffering from hyperinflation, severe scarcity, and poorly-managed state-owned companies.


Maduro’s government has done its best to keep up with debt commitments, even though it has meant a great deal of trouble for the population, since the funds to pay for bonds and other liabilities have been gathered by neglecting imports of raw materials and essential daily-consumption products such as meat, corn, sugar, and rice.


This was indeed an unsustainable pattern that has left the country submerged in a severe humanitarian crisis that has caused a growing discontent among citizens.


Nevertheless, on Thursday, as it has been predicted by analysts, the days of punctual debt payments have finally reached a sad end, after the President announced that its government will work on a “restructuring of all future payments” that will start after paying $1.1 billion of a bond issue that matured that same day.


The announcement was a little confusing for investors, as the President didn’t expressly declare a default, nor did he establish the ground rules of a restructuring or a refinancing of the debt. Both of these are quite a long-shot for a government that has been critically crippled by U.S. sanctions in terms of debt-related dealings and also, one that has a very low credibility within the markets regarding potential economic policy shifts.


In fact, there are actually very limited alternatives to a default, since a restructuring process will require painstaking negotiations that can take years, as was the case of Argentina during its debt crisis. On the other hand, refinancing is a very unlikely scenario, as investors don’t trust the government enough to accept proposals that easily.


In this regard, Jim Barrineau, co-head of the emerging market’s debt department at Schroders, has said that a “restructuring has a very close to zero possibility given U.S. sanctions, time constraints given the payment schedule, and the fact that Venezuela obviously does not have the technical capacity to negotiate even if those other issues were not there”.


Additionally and in line with Barrineau’s comments, Asdrubal Oliveros from Ecoanaltica, a financial and economic consulting firm based in Caracas, has also said that “without a team, without a communications strategy, and without a plan, I see a restructuring impossible”.


There are definitely major challenges ahead for Venezuela’s economy as its central bank currently has less than $3 billion in cash to pay for all the country’s financial commitments (an estimated $65 billion burden).  And financing alternatives are now reduced to perhaps China or Russia’s willingness to help the regime in surviving this new dark season.


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