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Generational Dynamics Web Log for 4-Nov-2017
4-Nov-17 World View -- Socialist Venezuela may or may not have declared bankruptcy on Thursday

Web Log - November, 2017

4-Nov-17 World View -- Socialist Venezuela may or may not have declared bankruptcy on Thursday

Socialist Venezuela may have reached the end of its economic road

by John J. Xenakis

This morning's key headlines from

Socialist Venezuela may or may not have declared bankruptcy on Thursday

During his televised speech on Thursday, Maduro grabs an empanada (a rich pastry) from his desk drawer when he thinks the cameras are off, while most of his people are starving (Caracas Chronicle)
During his televised speech on Thursday, Maduro grabs an empanada (a rich pastry) from his desk drawer when he thinks the cameras are off, while most of his people are starving (Caracas Chronicle)

In a nationally televised speech on Thursday, Venezuela's Socialist president Nicolás Maduro Moros announced that Venezuela would be "refinancing and restructuring" and "reformatting" its debt:

"I decree a refinancing and restructuring of external debt and all Venezuelan payments. We’re going to a complete reformatting. To find an equilibrium, and to cover the necessities of the country, the investments of the country. ...

We have to pay the amount of US$1.121 billion from the Pdvsa 2017 bonus and we have the money to fulfill this obligation," the head of state announced, adding that the government also has resources to continue providing necessities to Venezuelans.

We have the money for this payment, and we also have the money for raw materials, medicines and food. ...

I am naming a special presidential commission led by Vice President Tareck El Aissami to begin refinancing and restructuring all of Venezuela’s external debt and (begin) the fight against the financial persecution of our country."

As various articles have pointed out, this announcement by Maduro didn't make sense, and was contradictory. Refinancing and restructuring are two different things. Refinancing implies an orderly market transaction, while restructuring implies a default and bankruptcy. Nobody knows what "reformatting" is.

Some analysts are suggesting that Maduro is in so far over his head that he doesn't know what he's talking about.

The "special presidential commission" will be led by Vice President Tareck El Aissami, who is under sanctions by the US Treasury Department for protecting drug lords and overseeing a network exporting thousands of kilograms of cocaine. El Aissami announced that his government will hold a bondholders meeting on November 13 to reaffirm Venezuela's commitment to paying off its debts.

Maduro says that Venezuela would make a $1.1 billion payment that's due now. That payment was made, and if it hadn't been, then Venezuela would be in default, but it still makes no sense to make a payment just before refinancing or restructuring.

Finally, Maduro says that even with this payment, the country has the money for raw materials, medicines and food. Actually it doesn't. Maduro has been starving the people and the hospitals for years, and that isn't going to change.

Venezuela got into this situation by faithfully following Socialist principles. When oil prices were high, Maduro's predecessor Hugo Chávez used the overflowing treasury and even borrowed more money to buy votes with enormously expensive social programs. When oil prices crashed in 2014, Maduro paid off debts by incurring huge new debts. Telesur Tv and Reuters and Bloomberg and Washington Post and DealBreaker

Socialist Venezuela may have reached the end of its economic road

All told, there’s $143 billion in foreign debt owed by the government and state entities. Maduro would like to borrow more money, to incur even larger debts to make payments on current debts, but is unable to do so since August 28, when US president Donald Trump imposed sanctions that prevent further borrowing.

The International Monetary Fund said last month it expects inflation in Venezuela to reach 2,350% in 2018, up from about 500% in 2017. This has made Venezuela's currency, the bolivar, almost completely worthless.

Because Venezuela's bonds have been high risk for some time, they've been paying very high yields (interest rates) - almost 10 times as higher than those of neighboring Colombia. Investors have purchased these bonds hoping for big returns. Big institutional investors in the United States include T Rowe Price, Ashmore Investment Management, BlackRock Investment Management, and Goldman Sachs.

Because of US sanctions, Maduro can't borrow any more money from Western companies "Today, if Venezuela wants to go out to the world to refinance one of these bonds we have to pay, it can’t. It’s prohibited by the global financial dictatorship of the North American empire."

Maduro could borrow more from China and Russia, which are not covered by US sanctions. However, Venezuela already owes $37.2 billion to both countries, and both countries are said to be demanding economic reforms.

Venezuela is sitting on the largest oil reserves in the world, but oil production under the Socialist government has fallen almost 3% this year. The disastrous Socialist economy is in disarray, and its refineries run at less than 50% of the available capacity, because the oil companies are being run by Maduro's Socialist cronies, not by people who actually know how to run an oil company. In the past, Venezuela has borrowed money from Russia and China via an oil-for-loan agreement, but oil production has been falling because of the incompetence of Maduro's Socialist cronies.

In the 1980s, the Soviet Union took on the task of supplying money to Socialist Cuba. Now Russia has to decide whether to take on the task of supplying money to Socialist Venezuela, which has three times the population, at a time when Russia's own economy is in despair.

So Maduro has three choices.

First, he can convince Russia to bail him out again, and continue bailing him out forever into the future.

Second, he can simply stop paying, and go into default. In this case, his creditors will go after the country's foreign assets, including Citgo and tankers that dock at foreign ports.

And third, he can try to convince Western investors, along with the IMF, to bail him out. They would only agree to this if Maduro agreed to massive economic reforms, and probably Maduro himself would have to step down.

Recent history tells us that Russia will bail him out at least one more time, but even Russia may be losing patience. With Tareck El Aissami's meeting with bondholders scheduled for November 13, we may have an answer soon. Reuters and Bloomberg and Economist

Related articles:

(Comments: For reader comments, questions and discussion, see the 4-Nov-17 World View -- Socialist Venezuela may or may not have declared bankruptcy on Thursday thread of the Generational Dynamics forum. Comments may be posted anonymously.) (4-Nov-2017) Permanent Link
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