Venezuela on the verge of default

“We are going to pay the amount due in the next few weeks. We have the fortitude and capacity to continue to fully meet our international obligations this year,” President Nicolás Maduro said during a meeting with his economic team in Caracas last week. Although the statement was applauded, there are reasons to question whether Venezuela has the resources to pay.

The country must come up with $6 billion to cover its sovereign debt and loans owed through the state oil company, Petróleos de Venezuela (Pdvsa), this October. Since taking office in February 1999, the Bolivarian Revolution has made punctual payments on its debts. But now that the government holds an unbalanced balance sheet, there is reasonable doubt as to whether Venezuela – the country with the largest crude oil reserves on the planet and more than $100 billion in oil exports on average every year – has enough resources to meet its obligations.

“I do not believe they have them but I do believe they will pay. That’s why they’re rushing to sell Citgo,” says José Guerra, a well-known economist and former research chief at Central Bank of Venezuela (BCV) for many years. Citgo is a Pdvsa subsidiary and US-based oil refinery network that includes three plants and 6,000 gas stations. International media outlets have said the government put the network up for sale to the highest bidder. “They are willing to make any sacrifice in order to pay,” Guerra says.

Last week’s announcement has not dissipated doubts about Venezuela’s solvency. In fact, the financial markets punished Venezuelan bonds, and they experienced their worst rout on the New York Stock Exchange in a year. The bonds made a slight recovery on Tuesday. Still, investors are not sure Venezuela will pay. Maduro’s 16 months in office have coincided with a 10-percent loss for Venezuelan bondholders.

If Venezuela defaults, the situation will be worse than Argentina’s”

Economist José Guerra

Meanwhile, two Venezuelan economists at Harvard University, Miguel Ángel Santos and Ricardo Hausmann, ex-minister in Carlos Andrés Pérez’s Social Democratic administration between 1989 and 1992, dared to utter the unmentionable. In a column published last Friday on Project Syndicate, they not only fed the doubts about Venezuela’s ability to meet its obligations but they also gave a moral outlook on the situation the chavista regime faces: “The fact that his administration has chosen to default on 30 million Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude. It is a signal of its moral bankruptcy.”

Venezuela is experiencing a severe shortage of consumer goods. The government owes $4 billion to international airlines – a situation that could leave the country without airline service and thus isolate the nation. Unpaid invoices for $150 million in foreign currency purchases have made it impossible to import printing paper and newspapers have closed or reduced their distribution. Billion-dollar debts to pharmaceuticals, automakers and food producers, among others, have led to a shortage of goods on the domestic market. In light of this selective default in trade which affects the ordinary citizen, Hausmann and Santos ask, should Venezuela default on its foreign bonds?

The financial sector quickly reacted to the situation. A Venezuelan-born analyst at Bank of America, Francisco Rodríguez, hurried to say that “Venezuela has foreign income streams to satisfy its need for imports and to meet its international obligations.”

“Default is a big word,” José Guerra said. “If Venezuela defaults, the situation will be worse than Argentina’s because Argentina has the means to subsist and Venezuela does not.” The most reasonable way forward would be for the country to restructure its debt but the Maduro administration refuses because it wants to avoid negotiating with the demonized multilateral organizations and protect itself from high interest rates that the market would impose on its new bonds.

Translation: Dyane Jean François