Bondholders had until Oct. 12 to decide on whether to take Venezuela up on an enhanced premium for its latest bond swap offer for the country’s oil company, Petroleos de Venezuela S.A., or PDVSA. In short, people who already had a stake in Venezuela’s debt through bonds were being given the offer to switch their old bonds for new ones that offered higher yields.
What was new about this debt issuance was that the country would use Citgo—the U.S.-based but Venezuelan-owned refinery and gas company—as collateral in the proposed swap.
The measure received considerable attention in the business media and was “rejected” by the opposition-controlled National Assembly, who have fought against anything put forward by the government of Nicolas Maduro almost as a matter of principle.
Outside of the Latin American country, there has also been an unfavorable response to the move.
Standard and Poor’s downgraded PDVSA to CC from CCC following the announcement of the debt swap offer, calling it a “distressed exchange,” with Moody’s following suit. S&P signaled that the move would put the Venezuelan oil giant into “Selective Default,” with its analysts saying that bondholders would be “coerced” into accepting the swap—even as Venezuelan officials maintained the previous commitments would be honored for those who did not participate.
Not surprisingly—given the number of red flags raised—Venezuela has had trouble getting the required number of creditors to sign on to the deal. But some experts see this as a mistake.
“I think that investors have consistently been wrong, given that this country has proved to be one of the best countries to lend to,” Francisco Rodriguez, chief economist at Torino Capital, told teleSUR.
According to Rodriguez, formerly Chief Andean Economist at Bank of America Merrill Lynch and prior to that the top economist of Venezuela’s National Assembly, concerns about a default don’t consider the strength of collateral placed on the swap, nor the means and record of the country in paying its debt. Torino places the value of Citgo at US$5 billion, while Venezuela has posted among the best track records in the region in paying its debt.
Venezuela’s very real economic problems aside, even Forbes recognizes that ”Venezuela is fundamentally solvent.”
Even without missing debt payments and the considerable assets—including US$11.8 billion in international reserves and assets like Citgo and the US$3 trillion-valued PDVSA—to ensure payment. Even as the success of the swap offer remains in doubt, the business world continues its forecasts of an “imminent default.”
For the Latin American nation, however, solvency is not the issue.
In August, Citibank resigned as pay agent on PDVSA bonds, months after they decided to close certain Venezuelan accounts.
“The second decision (to resign as bond agent) is stranger, because a bank assumes the responsibility to be an agent when bonds are emitted and even though a bank can resign, there is an expectation that the bank will stay on through the term of the bond,” Rodriguez says.
According to global intelligence firm Stratfor, Citibank’s decision was “motivated” by U.S. allegations of “criminal activities by individuals associated with PDVSA.” For the better part of two years, U.S. authorities in various departments have been lobbing accusations of corruption and illicit trafficking at Venezuelan government and military officials—none of which have been backed up by evidence or even formal charges.
So the current predicament in Venezuela’s debt, apparently initiated as a response to hostile accusations by the U.S. government, is that the country may have the means to pay its creditors, but not the channels.
For Rodriguez, there are a number of factors that go into explaining the distance between the country and creditors, such as the lack of confidence in the socialist government’s policies by lenders. But when looking at other oil producing nations facing similar challenges since the drop in commodity prices, Venezuela’s lack of access to credit stands out.
“We know that Saudi Arabia has problems—so does Nigeria—but on the surface, they don’t seem to have as many problems as Venezuela,” Rodriguez says. “The difference is (that) these countries have access to markets … markets are willing to lend to them, but not to Venezuela.”
So how does the market consider a country the “biggest bang for your buck on the planet” and simultaneously close its access to lenders and investors?
When asked about the prospect of an orchestrated campaign—similar to the directive by the Nixon administration against the government of Salvador Allende in Chile to “make the economy scream”—Rodriguez says that political analysts would have to debate that, but acknowledges that “the issue of whether you can get a bond agent or not, is invariably influenced by U.S. foreign policy.”
While refraining from speculating on this being a product of design to block Venezuela’s access to financing—as the United States government did explicitly with Chile’s Allende—he does nevertheless underscore the unsettling reality at the heart of the matter.
“What I can say is that at this moment, the financial markets are closed to Venezuela,” Rodriguez concludes.