Default Day in Venezuela

[EX500rider]

17. More:

"Yesterday Venezuela held a bondholders meeting in the capital. Only about a quarter of the 400-450 bondholders sent representatives and these appeared to show up more out of curiosity than anything else. Venezuela owes about $150 billion (most of it bonds) and most of the debt is held by banks and other financial institutions (mutual funds, pension funds and so on). The government sent out repeated invitations (via the Internet) for about a week in which it described a bondholders meeting that would feature government officials describing and discussing how Venezuela was going to restructure and refinance its huge debt. In the previous week significant fractions of that debt was declared in default and more is expected to follow. The bondholders meeting lasted about 30 minutes and largely consisted of the Venezuelan vice-president Tareck El Aissami blaming all the financial problems on the United States. Aissami has been accused of dealings with Hezbollah, Iran and drug gangs. He is a former interior minister who was appointed the successor to president Maduro in January. Since 2000 Iran and Hezbollah have been welcome in Venezuela and Aissami was part of that. The U.S. has sanctioned Aissami because of his drug smuggling activities. Aissami, or someone from the government, was supposed to show up and reassure bondholders but those who attended only left with gift bags containing samples of Venezuelan chocolate and coffee. President Maduro promised, as recently as the 12th, that Venezuela would never default on its debt and has offered to continue discussions in Venezuela with bondholder representatives. But at this point that is less likely than discussions among bondholders.

For Venezuela the worst aspect of this is the prospect of the state oil company bonds defaulting. About half the bond debt is connected with the state oil company and if any of those are declared in default bondholders can go to foreign courts for authorization to seize overseas assets of the Venezuelan state oil company. That sort of thing tends to work. Once that happens Venezuelan oil revenue drops sharply and so does what is left of the Venezuelan economy. China and Russia are trying to come up with some way to help but so far they have no workable plan either.

Venezuela recently revealed that oil production had hit a historic low, falling beneath two million BPD (barrels per day). September production was 2.085 million BPD while in October it was 1.955 million BPD and headed lower. Production has not been this low since 1989. Production averaged 2.373 million BPD in 2016 and 2.654 million BPD in 2015. The production decline accelerated in 2017 and is expected to fall to 1.6 million BPD in 2018. This is down from a peak of 3.5 million BPD in 1999, when the current government took power. The subsequent government corruption and mismanagement has devastated the Venezuelan oil industry and caused a decline in oil production that is headed towards unprecedented low levels. The production decline is continuing, because the government refuses to clean up the mess in the national oil company and the oil production facilities.

China has been a major lender and has provided about $50 billion since 2007. Most of these loans are repaid with Venezuelan oil. The amount of oil owed China increases as the oil price declines, which means Venezuela has less oil to sell for current needs. Because the socialist economic policies have driven most manufacturing, and even agricultural enterprises out of business nearly everything has to be imported. China fears that they may not see a lot of their loans repaid and are demanding more oil instead. In 2014 China was receiving over a third of Venezuelan oil exports and now that is nearly half. Currently China is owed $28 billion and Russia $8 billion. In late 2016 China agreed to invest $2.2 billion to upgrade Venezuelan oil facilities. To pay for this Venezuela agreed to increase shipments of oil to China from the 550,000 BPD (most of which is paying for past loans) to 800,000 BPD. That upgrade program never got started because China discovered the state oil company was a chaotic and corrupt mess. China and Russia see opportunities in Venezuela but they are complicated by the growing list of sanctions on Venezuela because of many crimes the government has been accused of. The government is trying to deal with this by staging a highly publicized anti-corruption campaign but this effort does not involve going after many, if any, of those triggering the sanctions (for everything from drug smuggling and money laundering to murder of general abuse of political opponents. Russia and China can block UN sanctions but not those coming from the U.S. and EU (European Union)."

https://strategypage.com/qnd/colombi/articles/20171114.aspx