Most PDVSA bonds are written under New York law and the company has considerable US assets, such as its refinery Citgo. All this means that a PDVSA default would likely result in legal action and the pursuit of claims against assets in the same way that some hedge fund creditors went after Argentina.

A Venezuelan default could be messier than Argentina’s

Brian Caplen | 31/05/2016 11:43 am

Venezuela faces severe economic, social and political instability as the policies of late president Hugo Chávez continue to unravel, leading to fears that the country could be set for a default that is hard-hitting even by Latin American standards, as Brian Caplen writes.

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Venezuela has larger oil reserves than Saudi Arabia but its citizens currently face food and electricity shortages, inflation of 500%, rising unemployment of 17% and one of the worst crime rates in the world. 

Even so there are those Chavistas – supporters of late president Hugo Chávez’s so-called Bolivarian Revolution – who claim this is all the result of imperial forces wishing to bring the country down and who reject any kind of conventional economic policies. 

Other analysts describe Venezuela’s problems as an extreme form of 'the oil curse' that allows easy spending when prices are high but also results in a failure to diversify the economy and undermines its productive capacity through unfavourable policies. 

Either way, Venezuela is in big trouble and its economy is likely to shrink by 8% this year. Money is being printed to fund a budget deficit of 17% – hence the high inflation – and the central bank recently sold $1.7bn of gold reserves to repay debts. 

While Venezuela’s total debt-to-GDP ratio is not sky high – about 64% of GDP – there are still fears of a default and speculation that any restructuring could be messier than Argentina’s. 

For a start, a substantial portion of Venezuelan debt is held by the state-owned oil company PDVSA and these bonds do not contain collective action clauses that would typically allow a restructuring to go ahead with 75% creditor approval. Unlike Republic of Venezuela bonds, PDVSA bonds do not have grace periods for principle repayment, meaning that a credit event occurs any time a principal payment is missed. Most PDVSA bonds are written under New York law and the company has considerable US assets, such as its refinery Citgo. All this means that a PDVSA default would likely result in legal action and the pursuit of claims against assets in the same way that some hedge fund creditors went after Argentina. 

Of the total Venezuelan debt of $140bn, some $49.5bn is held by PDVSA and a further $26bn is in the form of Chinese loans repaid in barrels of oil. Venezuelan officials say they have reached agreement with China to extend the loans, but how this would all work out in extremis is another unknown factor. 

Meanwhile, the political as well as the economic and social situation in Venezuela remain unstable. A very ugly 'Argentina mark 2' cannot be ruled out and the failure to put the country on a long-term sound footing is the real Chavez legacy.

Brian Caplen is the editor of The Banker.