Venezuela bondholders: the time has come.
This day was inevitable. You don't watch a petty tyrant ascend a devastated political system with the promise that his deceased predecessor came to him in the form of a small bird without expecting some kind of reckoning for investors down the line. Still, Venezuela has for years assured the world's markets that however violent and corrupted and miserable its domestic situation became, bondholders could rest easy. Although the world has remained skeptical, the Venezuelan government's line held steady – until now:
President Nicolas Maduro vowed to make a $1.1 billion payment on a bond maturing on Thursday, but also created a commission to study “restructuring of all future payments” in order to meet the needs of citizens.
It might come as a surprise that Maduro seems to know what he's talking about when it comes to potential international financing arrangements for no-longer-sustainable debts owed by the state-owned oil company Petroleos de Venezuela. But don't worry, he doesn't:
Maduro seemed confused by the bond market’s terminology and, in turn, wound up leaving traders perplexed as to his exact intent. One second, he was calling for a “refinancing,” a word that implies a routine, market-friendly transaction, and the very next for a “restructuring,” a term more generally associated with coercive government action that imposes losses on creditors and is typically labeled a default. He didn’t say if the country will make other debt payments that are coming due in the next weeks.
For Venezuela bond-holders (we're looking at you, Goldman), this is just the beginning. All the turmoil and madness of the past few years – the international condemnation, the American political intercessions, the (theoretically) growing moral implications – has simply been prelude to what we all knew was coming: the money actually truly running out. And what comes after that only gets uglier.
The weird thing about Maduro's already-mystifying announcement is that it came on the heels of a bond payment for notes due in 2020 that Venezuela made at the last minute – and only after missing a few other, lesser deadlines. So just after shipping off a bunch of cash to keep default at bay, Maduro hinted that some form of default was still looming.
In the case of default, it's hard to tell what investors might be expecting. Regime change could expedite the restructuring process, but likely not to investors' advantage, thanks to the likely international borrowing and IMF haircuts that that would entail. Meanwhile, the sanctions placed on Venezuela this summer make it all but impossible to carry out a restructuring, since that would involve issuing new debt that Americans are now forbidden from buying. Then there's asset seizures, which could get, uh, messy.
So maybe Venezuelan debt investors are getting their just deserts.