Day of Venezuela’s Likely Debt Default Approaches

Longstanding fears of a Venezuela debt default crystallized Wednesday, as the political crisis engulfing the sinking oil-rich OPEC state deepened.

Investors were bracing for what looked to be an inevitable “credit event” that analysts said could arrive within days – before a “refinancing and restructuring” of the debt called for by Venezuelan President Nicolas Maduro.

While the country’s isolation means the risk of contagion to international financial markets is limited, a default could trigger a global rush to seize assets owned by the Venezuelan government and its state oil company PDVSA, and plunge the struggling nation into a full-blown humanitarian emergency.

Already, its 32 million citizens are suffering shortages of food, medicine and other essentials as their money, the bolivar, is decimated by hyperinflation and recession reigns. Hundreds of thousands have left the country to survive, and many, many more could follow.

Venezuela teeters on the brink of "highly probable" debt default. pic.twitter.com/Qxkhjx4FpI

— AFP news agency (@AFP) November 8, 2017

US, EU Sanctions

The United States, which has slapped successive sanctions on Venezuela and its ability to issue new debt on U.S. markets, called for a U.N. Security Council meeting next Monday to discuss the crisis, particularly its political aspect.

“What we have today in Venezuela is a state of non-democracy with many violations of human rights and political rights,” Argentine President Mauricio Macri said in New York after meeting with UN Secretary-General Antonio Guterres.

He told the Financial Times the U.S. should impose “a full oil embargo” on Venezuela. Such a move would have “broad support” across Latin America, he said.

European Union countries backed an arms embargo on Venezuela as part of a sanctions package also set to include a blacklist of Venezuelan individuals, diplomatic sources said.

“The political aim remains to force the government to get round the negotiating table with the opposition and contribute to getting out of the current political crisis,” one diplomatic source said. “It’s a gradual, flexible and reversible tool.”

Russia Debt Deal

The only bright spot for Venezuela was Russia saying Caracas had agreed to its terms for restructuring the part of the debt it holds, with an accord to be signed within a week.

“Venezuela has confirmed the conditions that were agreed and so the process will move to a final phase,” Russia’s Minister of Finance Anton Siluanov told the Interfax news agency.

Venezuela’s official debt to Moscow stood at $2.8 billion as of 2016, with another $6 billion owed to oil giant Rosneft, which is closely allied with the Kremlin.

That, however, is just a fraction of Venezuela’s total debt mountain, estimated at $150 billion.

Around $45 billion is sovereign debt, another $45 billion is owed by PDVSA, and $23 billion is owed to China, according to estimates by private consultancies.

For a country with the world’s largest proven oil reserves – nearly 300 billion barrels, worth more than $15 trillion – such debt normally should be bearable.

But decades of mismanagement, destruction of Venezuela’s private sector, big spending on social programs, lack of infrastructure investment, rigid currency controls and the fact that oil exports are now essentially debt repayments rather than income all conspire to shove Venezuela to the edge of the precipice.

The country has just $9.7 billion in hard currency reserves, yet debt payments due in 2018 total $8 billion.