Investors buckled, but the country’s plight is only getting worse.
By Nick Cunningham, Oilprice.com:
Venezuela just dodged a bullet, pulling off a last minute bond swap with creditors. The deal only buys Venezuela a little bit of breathing room, and a default at some point next year or the year after is not out of the question. Either way, the South American OPEC nation’s oil production is falling and will only continue on a downward trajectory.
Venezuela’s state-owned PDVSA avoided default at the eleventh hour, getting enough creditors onboard for a debt swap. The oil company had repeatedly offered creditors to exchange debt set to mature this year and in 2017 for payments spread out over the rest of the decade, a proposal that would allow the company – and the sovereign government – to technically avoid default.
But after investors rebuffed at least four offers for a debt swap due to unfavorable terms, they finally agreed to a deal on Monday to swap a portion of the $7.1 billion that PDVSA had due in the coming months.
PDVSA had warned a few days ago that a default would come as soon as this week if creditors did not sign on. “Low oil prices will adversely affect the company’s ability to generate cash flow from operations, which will impair the company’s ability to make scheduled payments on its existing debt, including the existing notes,” PDVSA said in a statement last week.
With few options left, it was in both PDVSA’s and the creditors’ interest to make a deal, according to Siobhan Morden, head of Latin America Fixed Income Strategy at Nomura Securities. “It’s logical that this exchange goes forward and PdVSA accepts whatever cashflow relief the market is willing to provide so that muddling through continues.”
But even if it can avoid default this time around, the Venezuelan government only has foreign exchange reserves of $12 billion, a figure that is dwarfed by its debt load.
The fallout from a default would be terrible for Venezuela, but how the situation plays out is unknown. PDVSA’s assets overseas could run into trouble.
“I wouldn’t be surprised if you see new precedents in terms of being able to seize oil assets on boats, because the U.S. government is going to be very anti-Venezuela obviously. For sure Citgo refineries get seized,” Eric Fine, bond fund manager for Van Eck Global, told Forbes in an interview. He also warned that a PDVSA default would almost certainly be followed by a sovereign default.
Not only are the finances of the two entities intertwined, but once the company defaults, the government would probably lose access to financial markets as well, so paying off debt will merely be a waste of the little bit of cash it has left. For this reason the government has been intent on meeting its obligations even as people go hungry in the streets.
While PDVSA is flirting with insolvency, Venezuelans are much more focused on the country’s political crisis, which is just as bad as the economy. Last week, the government of President Nicolas Maduro cancelled a vote that threatened to remove him from office. For more than a decade, Venezuela, under the late President Hugo Chavez and then Maduro, has seen a steady erosion of its democratic system. But cancelling the recall election is “the most blatant” move yet, says Siobhan Morden of Nomura Securities.
President Maduro, meanwhile, has been undertaking some shuttle diplomacy to oil producing countries in recent days to get them on board for the pending OPEC production cuts. But while he was in Azerbaijan and Iran, Maduro’s problems at home began to bubble over.
On Sunday, the opposition led Congress pressed to put Maduro on trial for violating democracy. The heated session even saw injuries inside the legislature as the two parties broke out into fist fights. The opposition, once fractured but now increasingly united against Maduro’s overreach, is planning a major protest on October 26. The Eurasia Group, a political risk firm, said the cancellation of the recall vote leaves no other avenue for an outraged public than to take to the streets, “increasing the near-term risk of a social eruption amid food shortages and soaring inflation.”
PDVSA may have just avoided default but its poor position likely means that things will continue to deteriorate. The battered state-owned firm is already dealing with declining production and has no cash left to conduct maintenance. Drilling is at a standstill and PDVSA is already in arrears to oilfield services companies like Halliburton and Schlumberger. Output is down 11 percent in the 12 months ending in September, and more declines are expected. In an October 23 article, The Wall Street Journal reported that PDVSA has been reduced to flaring gas and burning oil because it does not have any money left to pay for processing equipment. So not only is production declining, but PDVSA is unable to even sell all of the oil and gas that is coming out of the ground.
It is hard to imagine things getting worse than they already are. PDVSA may have kicked the can just a little bit down the road, but Venezuela’s problems are not going away. By Nick Cunningham, Oilprice.com.
Was it all a mirage? Read… Could the Bottom Fall out of this Oil Rally?
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To the gold and silver preppers, take a good look at Venezuela. Nobody is going to trade you food or medicine for your gold and silver when the SHTF.
Then all the illegal gold miners that sell their gold for US dollars which can be exchanged for bolivars at 125x the official exchange rate are wasting their time? The ‘parallel’ market is the real market in Vz … or anywhere.
The S has hit the fan. There is blood in the streets. You are infinitely better off with gold or silver than useless and maybe soon to be scrapped Venezuelan money. There are gold dealers with US$ waiting in parts of Africa where there are no roads.
But I will agree with you to this extent- there is a collapse there but not in the outside world.
Some US preppers are preparing for a TOTAL collapse- or possibly survival after a nuclear war. Under those conditions gold and silver might be inferior to ammo. which is compact, durable, and uniform ( within caliber)
However most inferior of all would be the dollar, a check drawn on a bank that no longer existed.
Folks in the Western democracies tend to be more or less, believers in currency. The gold bugs are a minority although a growing one. During the Depression nothing appreciated like US $, C$ or British pounds.
The anglo-sphere has seen inflation but has never seen a currency disappear.
Latin America goes through currencies like s&&t through a goose- I believe Argentina is on its third.
But Africa goes through them like a goose with the trots.
And they do it aggressively- with little warning.
It’s partly confiscation, you trade the old money for new money at a loss, rewarding the printer of new money.
Satchels of expired money have been found at airports, where it timed out like Cinderella’s pumpkin and turned back into paper.
Lately changes in the design of the US 100 note are more frequent, as counterfeiters got better.
But about 20 years ago the first change in a long time in the US 100 caused a panic in Moscow and a few other places.
They had to be reassured that this didn’t mean the old note was no good.
Trivia: years ago through an estate of a relative I came into a small German accordion- which I call a squeeze box. It was a Hohner, a very basic nice sounding thing. It still had the box, with a fanciful scene of a sailor serenading a skimpily clad local gal on a tropical island.
The price had been changed from a large number to a much smaller one. This was the re-pricing from the Reichsmark to the Deutsche Mark.
Take a look at Homestake Mining in the 1930s! Price and dividend increased seven-fold between 1929 and 1936. Homestake was the basis for the Hearst family fortune, but it really took off when FDR devalued the dollar.
And all this with currency sovereignty. Who knew?
Now if only Greece got its back- all would be well?
Nick, you may have missed the point. The accumulated debt or bonds must be paid back in foreign currency. That is the problem Venezuela has, there bonds are not paid back with their sovereign currency, unlike the U.S. Greece does not have a sovereign currency, they use the Euro produced by the European Central Bank, owned by multi-national governments.
Socialism: You wait in queues for bread.
Capitalism: Bread waits in queues for you.
Yeah, right. And when I gave food to the poor, they called me a saint. When I asked Why the poor were hungry, they called me a communist.
Your bread is overpriced and moldy besides.
Venezuela? Isn’t that a wholly-owned subsidiary of Goldman Squid? Or am I getting ahead of myself here?
GS would probably be involved if there were commissions to be made on financings using gold swaps, i.e. 100% collateral, delivered off-shore to lender’s custody. Gold reserves have dropped by about half due to swaps in the last couple of years.
Any businesses there have been nationalized or are closely supervised, even the smaller ones, and run at zero to maybe 30% of capacity so there is not the internal capability to pay debt, or even in many cases, the workers.
Peak dynamics ?
In 2015 the oil price collapsed and the global economy contracted by 5 percent in dollar terms.
Productivity growth is falling towards zero. Interest rates and bond yields have turned negative.
Central banks are printing money to fight deflation and the tanking velocity of money.
“Central banks are printing money to fight deflation and the tanking velocity of money.”
And they’ll keep doing it even though they’re perfectly aware that monetary policy is utterly useless in accomplishing either. But since their best strategy is to blow bubbles, bubbles are what they will blow.
It should be obvious that their only goal is to enrich the wealthy and keep the livestock disempowered by preventing the possibility of an economic recovery. This was my prediction ten years ago and it’s proven right every day. It’s why the economies of the U.S. and Europe have been in recession since at least 2006, and why they will never recover.
One or two more crashes at most should be sufficient for TPTB to establish a permanent corporate totalitarianism and start ramping up the efforts to reduce the herds to conserve the resources of their planetary assets. You can watch it happen in real time.