For all the shit they get, it's not easy to be an investor in Venezuelan bonds. Beyond the obvious moral quandaries that must keep the still-somewhat-human of them awake at night, there's the basic fact that your job entails paying strict attention to the daily absurdities and bafflements that issue forth from the government of Nicolas “Crazy As A Goat” Maduro.
In that regard, last week was a gem. In a bewildering and plainly contradictory televised address, Maduro indicated that Venezuela had finally reached a fuck-it-let's-default level of fiscal desperation, an eventuality that bondholders prayed would never occur while knowing deep in their hearts that it must at some point. In his typical fashion, Maduro declared “a refinancing and restructuring of external debt” just before emphasizing that Venezuela had always made good on its debts.
Unsurprisingly, Venezuela's bonds sank on the news. And perhaps that was just the point, say sovereign debt experts Lee Buchheit and Mitu Gulati:
By announcing a debt restructuring and threatening a payment default, Mr Maduro drove the secondary market prices of the bonds off a cliff. Prices may fall further next week if Venezuelan officials say something alarming during the meeting in Caracas (how could they not?). Once the secondary market price of a sovereign bond drops below about 35 cents on the dollar, the issuer may be tempted to buy the bond back rather than slog through a debt restructuring exercise in which impertinent investors can raise questions about economic policy and corruption.
Is it possible that Maduro was just skillfully deploying his reputation as a bombastic imbecile in order to hoodwink the bond markets into handing Venezuela a brief opportunity to buy back its debts a just a third of the par value? Sure, it's possible! Ecuador did something similar back in 2008, apparently.
Though there remains the underlying issue of Venezuela having no money, which is why it's in this bind in the first place. How are they going to buy back their debt at 35 cents if they can't even make individual payments currently?
Oh, that's no problem:
China and Russia are possible candidates for fundraising; they have both ponied up in the past. Venezuelan insiders are already alleged to hold significant positions in some of the bonds. Perhaps they could be tempted to increase their exposure if the price is right. For sufficient remuneration, even some private sector (non-US) lenders may be prepared to provide funding for a debt buyback secured by a pledge of the repurchased bonds.
Whether this is actually the case and Maduro had some sneaky scheme in mind, it just adds one more dumb complication that Venezuelan bond traders have to contend with on a daily basis. That and the whole odious debt thing.