By Bianca Fernet, Argentina, Bianca@bubblear.com
Venezuelan President Nicolas Maduro met with China’s leader Xi Jinping last week in Beijing to beg for more money. And yesterday China acquiesced rather than risk losing money and ending up in the “vulture” category.
China is already Venezuela’s largest creditor and has loaned the country over US $50 billion since 2007 in exchange for delivery of oil. China has been fairly generous with the one South American nation that makes Argentina look not so bad in comparison. In July of last year Xi signed a US $4 billion cash-for-oil deal during his trip to Venezuela, and last year it relaxed lending terms by extending repayment deadlines and ending minimum shipping requirements.
As you can imagine, dropping oil prices are throwing a warehouse full of wrenches into the already tenuous utopian socialist paradise that Venezuela has built. Venezuela depends on oil for 95% of its export income, and oil and gas account for about 25% of GDP.
Since June 2014, oil has fallen more than 50% from a peak of US $115 per barrel to today’s new low of US $49. Blame has been placed on slowing growth in some of the most important emerging markets as well as the big DEFLATION word floating around the Eurozone, coupled with increased production in the US. Oversupply plus downturn in global demand has created a glut in the market, leading analysts to pile on top of each other to revise their forecasts down, some as low as US $36 per barrel, before prices pick up again.
To throw a little more perspective on the fire, Deutsche Bank determined that Venezuela needs a global oil price of US $117.50 per barrel to cover government expenses in 2015. That’s not going to happen.
Twitter is blowing up with photos of the chaos that has emerged in supermarkets and shops where Venezuelans are unable to buy the most basic of needs. Last year there was no shampoo or toilet paper. Apparently now there is no soap. Not the time to take a fun vacation to Venezuela.
And so President Maduro is taking the same route as Presidents Fernández de Kirchner and Putin, with a different nuance: He is mortgaging the resources of the country to China in the name of sticking it to the West to maintain an unsustainable system that impoverishes the people and in which rampant corruption thrives.
And in the case of Venezuela, it’s not even that appealing to China. The US $20 billion Maduro has negotiated with China may be part of a pre-existing arrangement rather than a new agreement. Furthermore, sources report that conditions are exceptionally harsh and would require Venezuela to increase daily shipments to China from over 500,000 barrels per day to over 600,000. More than half of current exports already go towards paying back loans.
Yet even though the likelihood of repayment of Chinas’ loans gets less and less certain as oil slips further, China faces every incentive to make any deal so long as it prevents a Venezuelan default. When China comes into countries like Venezuela, Argentina, or Russia during a crisis situation, it can paint itself as superhero falcon, savior of the day. But the reality is that swooping into resource-rich countries where no one else dares tread and shoving harsh terms down desperate leaders’ throats is at least as predatory as what Argentina’s famed vultures did, or possibly more so.
And while China can trumpet its lending programs as helping desperate countries in need, a default would put the shoe on the other foot.
If Venezuela defaulted on its debt rather than accessing new loans, it could take steps to restructure its existing debt rather than deliver the oil under the original loan terms. This could involve stopping loan payments and selling the oil at higher market prices to pay back the debt. By undertaking currency swaps and commodity-backed loans, China protects itself to some extent from default behavior from Venezuela, Argentina, and even Russia, but the old “risk vs. reward” adage bears heavily on these practices.
And in this case, the reward is long-term access to cheap commodities. By Bianca Fernet, Argentina, The Bubble.
As of January 1, Argentina actually could pay the “vultures” without going bankrupt. But it won’t. Read… In 2015, it Boils Down to this: Argentina Will Not Pay Because President Christina Doesn’t Want to