If Venezuela is to avoid a default, China will have to play a critical role. // Foreig Affairs

If Venezuela is to avoid this outcome, China will have to play a critical role. Over the past decade, it has provided Venezuela with approximately $65 billion in loans. Roughly a third of Venezuela’s debt is owed to China. So far, China has been willing to help keep the country afloat—it wants privileged access to Venezuela’s oil reserves over the long term—with loans in return for oil shipments. But with the price of oil so low, half of the oil Venezuela ships to China every day (over a third of Venezuela’s total production) is used just to repay previous loans.

The Chinese share of Venezuela’s foreign debt, however, may be the easiest to restructure, thanks to the decadelong alliance between Beijing and Caracas. Given China’s interests in Venezuela, China would probably be willing to extend payments and grant some concessions in return for even greater access to the country’s oil and minerals on favorable terms.

If Venezuela is to avoid a default, China will have to play a critical role.

Yet even reaching an understanding with China may not be enough for Venezuela to avoid the collapse of its economy and a default on the rest of its debt. Private international investors hold most of Venezuela’s government- and PDVSA-issued bonds, and they are much less inclined to strategic patience. As a result, Venezuela will likely go into default this year or next. As it does, it will have to work out a restructuring plan with its creditors. This will not be easy, however. Most Venezuelan bonds do not include collective action clauses, which allow a debt restructuring if a certain percentage of bondholders agree. Without this provision, even a small number of creditors could block a negotiated deal, as Argentina discovered after its own default in 2014. Since 2007, Caracas has had no ties with the IMF, rejecting the institution as an instrument of U.S. imperialism intent on imposing severe discipline on the nation. As a result, should Venezuela default, it will be shut out of the global economic system and, in all likelihood, be unable to export its oil. But if the country does not default, it could just be prolonging an unsustainable situation at an immense economic and social cost