Venezuela In Default

Back at the end of October I wrote an article on Venezuela and how close the country was to default. The title of the article was “Venezuela Averts Default, But For How Long?” That question has now been answered, it took 16 days.

According to S&P Global Ratings the South American country defaulted on a payment Monday after the 30-day grace period had expired on a payment that was due in October. This could be the final straw that leads to an upheaval and overthrow of the current government. The citizens are fed up with the current government and the awful living conditions, making a revolution and overthrow more likely.

It is a humanitarian crisis already and it could get even worse with the government defaulting on its debt. By missing the one payment we could see bondholders across the globe demand full and immediate payment. The Venezuelan government doesn’t have the means to do this which could lead to seizure of Venezuelan assets. The only real assets Venezuela has are the millions of barrels of oil the country has in reserves. Investors could seize the oil that is held outside Venezuela’s borders. This seizure could cause conditions to worsen in the socialist country. There is already a food shortage as well as a shortage of medical supplies. If assets are seized, these shortages will only become greater.

There are differing reports regarding how much debt the Venezuelan government has and how much is in default, but the government is trying to renegotiate with the debt holders. Russia is one of the biggest foreign holders of Venezuelan sovereign debt and it was announced on Wednesday that the two countries had worked out a restructuring of $3.15 billion in debt. Reportedly this would allow the Venezuelan government to meet debt obligations elsewhere.

The debt troubles are hurting the one industry that could keep Venezuela moving, the oil industry. With little else to offer the rest of the world in terms of goods or commodities, the oil-rich country needs to keep pumping oil. Unfortunately the oil production out of Venezuela has been in decline for several years, but it is still ample enough to place the country in the top ten oil producing countries with over two million barrels per day. A disruption in that production could rile the oil markets and drive prices up across the globe. As production has fallen and economic conditions have worsened, oil workers with the skills and knowledge to help have been fleeing the country which makes it more difficult to bring production back up.

Another issue at hand is the state owned oil company PdVSA. Venezuela has been careful in separating the assets and debt of the government and PdVSA so as to protect the company’s ability to keep up production. If those assets were to be seized by foreign investors, it would be catastrophic for the government and the people of Venezuela. This might be why they were able to make the debt payments of PdVSA a few weeks ago, but couldn’t meet the payments of other sovereign debt issues this week. Also at risk are the Citgo facilities and assets in the United States.

Given the current situation in Venezuela, it is hard to believe that the country was the richest country in South America as recently as 2001. The failed economic policies of Hugo Chavez, fixed prices and massive corruption have derailed the country and at this point it looks as if the only thing that will change the course of the country is an overthrow of the current government.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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