Venezuela Lowers Foreign Debt by $4.7 Billion

Venezuela plans to spend $4.7 billion to buy back a portion of its external debt. The debt buy-back will lower Venezuela´s total foreign debt burden by 15.2% and will free up as much as $600 million in interest payments.

By Alex Holland - Venezuelanalysis.com
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Caracas , Venezuela , March 1, 2006—Venezuelan Finance Minister Nelson Merentes has said the Venezuelan Government will pay off $4.7 billion of foreign debt in 2006. Merentes said this is to “free up money that can be invested by the government to spur economic growth.”

The majority of the debt being paid off is made up of $3.9 billion in Brady Bonds. Another $600 million comes from 15 private banks. The remaining $243 million is from the World Bank. On March 1, $700 million worth of Brady Bonds were also bought.

Brady Bonds are named after former US Treasury Secretary Nicholas Brady. They were created in 1989 to respond to the inability of many Latin American countries to pay their foreign debts. The Brady Bonds were supposed to make debt repayments more flexible.

Once completed the Venezuelan payoff should see total national debt fall by 15.2%, to $26.3 billion. Merentes says the government aims for Venezuela’s debt to be lower than 25% of Gross Domestic Product (GDP) by the end of 2008.

Venezuelan national debt grew during 7 years of high public investment on welfare programs. It also increased during a devastating oil strike in 2003 as well as general political instability. From the beginning of Chavez’s Presidency in 1998 to the end of 2005 public external debt increased from $23.3 billion to $31 billion.

Profits from high oil sales are helping the Venezuelan government pay off the debt. A special development fund set up last year called Fonden is providing $1.5 billion to buy Brady Bonds. Fonden is made up of foreign currency reserves which have been boosted by revenue from oil sales.

Money to pay for the debt also came from profits made on bond sales last year, Merentes said. According to the Finance Minister the government sold $1 billion of Argentinean bonds to 25 Venezuelan banks for a profit of $75 million.

Merentes said if the government kept on buying and selling bonds “Venezuela could get profits exceeding $400 million or $500 million a year.” Merentes also said “We want to create an international financial center in Caracas”.

By saving money that would otherwise be used on debt repayments $600 million will become available for public spending this year, Merentes said. The government indicated this money will be used on social and welfare spending.

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