Venezuela's long and winding road to debt restructuring

As if muddling through a humanitarian crisis and a sharpening political stand-off between authoritarian Nicolás Maduro and opposition leader Juan Guaidó weren’t bad enough, Venezuela will soon have to wade through what is said to be one of the messiest debt restructurings in history.

What will make Venezuela’s forthcoming debt workout so difficult to resolve is not just the amount of IOUs sitting on its balance sheet, but the diversity of its creditor base. Like most metrics in Venezuela, these exact figures are difficult to come by. A new report by the Institute of International Finance (IIF) tries to address this, quantifying how much Venezuela owes and to whom.

According to Sergei Lanau, the chief economist at IIF, Venezuela’s external debt has more than doubled in the last decade, from about $60bn in 2007 to roughly $160bn in 2018. The growth comes not from the private sector, but from the government and state-owned oil company, PDVSA, as the below chart from Lanau shows:

As Venezuela became increasingly closed off from global markets, Lanau notes the “creativity of policymakers in tapping alternative sources of financing,” which led to an “atypical debt composition for the standards of emerging markets.”

Dealing with the $65bn owed to bondholders from both the government and PDVSA would have been difficult enough on its own, but whichever administration eventually leads Venezuela will have to grapple with the additional $26bn owed to China and Russia. Beyond this bilateral debt, there’s a smattering of arbitration awards and promissory notes. And because Venezuela has defaulted on the majority of its debt, arrears — what should have been paid down already — are quite high. Here’s the IIF’s breakdown of what is due from the government:

And from PDVSA:

Creditors have begun to organise and plan their restructuring strategies in anticipation of regime change. A group of bondholders owning $8bn worth of Venezuelan debt has come together under the representation of law firm Cleary Gottlieb. While they have not yet turned to the courts, other lenders have. There are six lawsuits ongoing against Venezuela and PDVSA, including one from Greenwich, Connecticut-based hedge fund Contrarian Capital and another from London’s Pharo Management.

Even those that have taken the more litigious route will have to wait some time before settling on any restructuring deal. As Nomura’s Siobhan Morden writes in a recent note:

The political transition remains the pre-requisite for the next phase of economic recovery and negotiations with bondholders … Meanwhile, the bondholders remain in limbo with the political transition the pre-requisite for lifting the trading sanctions and eventual restructuring of debt.

And just how is this political transition going? Unfortunately, slower than expected. US sanctions continue to bite and propel the Maduro regime deeper into a liquidity crisis, but in the month or so since Mr Guaidó declared himself interim president, there have been no serious defections from the 2,000 military generals backing Maduro, according to Morden. Until that happens, or the US decides on some kind of military intervention, hopes remain dim for Venezuelans and bondholders alike for a resolution any time soon.