It’s Your Default, Not Mine! Maduro’s Doublespeak in Venezuela
By
Dimitra DeFotis
Nov. 3, 2017 11:05 a.m. ET
There's doublespeak from Venezuela on debt default as the nation scrambles to make a payment.
Bond prices were moving lower on uncertainty.
President
Nicolas Maduro said Thursday that the state-run oil producer Petroleos de Venezuela or Pdvsa would make a final $1.1 billion bond payment Friday, but he also issued another order regarding the country's roughly $120 billion in foreign debt, according to the Associated Press: "I decree a refinancing and a restructuring of all external debt and all of Venezuela's payments," Maduro said in a nationally broadcast address Thursday. So officially, there has not been a credit "event" that signals a formal default.
Siobhan Morden, head of Latin America Fixed Income Strategy at
Nomura Securities, writes that investors should not rule out an accidental default, though she thinks the government can probably make a past-due Electricidad de Caracas (Elecar) interest payment in a grace period that expires Nov. 9. Morden adds:
"... It’s almost like President Maduro is just admitting that they’ve run out of funds without knowing what to do next ... The latest comments from President Maduro are almost doublespeak – reaffirming payment on the PdVSA’17 (sending funds Friday), while at the same time calling for a restructuring of external debt via a presidential committee as of Friday. President Maduro named Vice President
Tareck El Aissami as heading the committee, which further complicates the process since the U.S. Office of Foreign Assets Control (OFAC) has
sanctioned Aissami as a narco-trafficker. There were no more details and it’s clear that there is no plan without investment banks or lawyers. The legal framework would also be challenging without approval from the National Assembly and U.S. sanctions also preventing issuance of any new bonds ... What could be Maduro''s possible intentions?
1) domestic political propaganda to diffuse the criticism on prioritizing external debt over imports. or
2) intentions for a selective default on the sovereign while remaining current on the PdVSA bonds and then buying time until the legal process eventually proves alter ego ...
3) Perhaps the idea is to launch a voluntary distressed exchange similar to Uruguay in 2003, but this would be extraordinarily difficult to organize ..."
Despite the near-collapse of Venezuela’s economy, its debt has been a top performer this year because loans from China and Russia have staved off default. While Venezuela is a small piece of emerging market bond indexes, some bonds are yielding in excess of 25%, and the impact of a default will be felt by passive investors. The
iShares J.P. Morgan U.S. Dollar Emerging Markets Bond exchange-traded fund (
EMB) is down 0.6% today. There are no Venezuelan equities in the
iShares Latin America 40 ETF (
ILF), but it is down 1.3% this morning.
"If Venezuela stops servicing its bonds, we will head towards one of the most complex and large sovereign defaults in history. Keep in mind that Venezuela is behind 25% of the
J.P. Morgan Emerging Market Bond Index Global index(EMBIG) carry despite a low 2.5% weight," writes
Juan Carlos Rodado, director of Latin America Research at
Natixis.
The Emerging Markets Trading Association (EMTA) decided that Venezuela bonds will now trade without interest and with rights to interest passing to the buyer, according to
Russ Dallen, a publisher and bond investor at
Caracas Capital.
"Clients who followed our call to buy Venezuela credit default swaps just made their year ... prior to Wednesday, we had never made the call to buy CDS," Dallen said in an email.
Subscribers can read my April column with more on what investors should expect in a default: "
Risk in Venezuelan Bonds Rises."
Also see all our recent free blog
posts on Venezuela's dire bond situation, including more on Russia's loan, in which Venezuela used U.S. Citgo refinery operations as collateral should it default. U.S. Treasury Secretary
Steven Mnuchin said the
Russia-Venezuela Citgo debt is a national security issue.
It’s Your Default, Not Mine! Maduro’s Doublespeak in Venezuela