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Venezuelan crisis

Crippling US sanctions shove Venezuela to the edge of a ruinous debt default

PUBLISHED : Wednesday, 08 November, 2017, 4:04am
UPDATED : Wednesday, 08 November, 2017, 4:04am

US sanctions against Venezuela have accelerated the already catastrophic decline of the oil-rich nation’s economy, and are pushing it to a debt default that economists say could happen as early as this week.

The aim of the latest US action is to choke off funding to Venezuela by blocking access to foreign currency.

The Trump administration announced the latest sanctions against Caracas on August 24 after labelling Venezuelan President Nicolas Maduro a “dictator.” They follow an earlier set imposed on July 31.

The impact will be in “stopping any new direct investment into the country, and in making any future debt emissions or renegotiation practically impossible,” said Shannon O’Neil, an expert at the Council of Foreign Relations.

The Maduro government last Friday called foreign creditors to a meeting November 13 in Caracas to renegotiate the debt but economists are dubious about the prospects.

Still the situation is critical. Venezuela is rich in oil resources, with the largest reserves outside the Middle East, but is fast running out of cash.

The central bank’s stockpiles of foreign currency “are now just US$9.7 billion, compared to total external debt of about US$110 billion,” said Edward Glossop, economist at Capital Economics in a note published on Monday.

Fitch and Standard&Poor’s each cut the rating on Venezuela’s foreign debt on fears default could be imminent, and Moody’s on Monday cut the rating for state oil company PDVSA.

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With the situation deteriorating, Andres Abadia, economist at Pantheon Macroeconomics, said: “The most recent sanctions have added to the pressure on Mr Maduro, making it practically impossible to secure funding.”

As the Maduro regime has become further isolated “the propensity of international investors to hold the country’s debt has diminished,” he added.

Even if there was appetite to hold the debt, US sanctions prohibit Venezuela from borrowing or selling bonds in the US financial system, and Citgo, a Venezuelan-owned oil company based in the United States, can no longer repatriate dividends or profits to Caracas.

By removing all potential sources of funding, with the exception of those from Russia or China, funding inflows, which already have fallen by more than 75 per cent in the last five years, have been further curtailed.

As a result, Abadia notes, imports have been slashed to “shocking levels,” to save scarce dollars, which has “deepened the humanitarian crisis.”

With a 10 per cent drop in oil production this year “the country is teetering on the edge of a full collapse in economic activity, and its inflation rate is now the world’s highest,” at 1,000 per cent on average this year and is expected to exceed 2,000 per cent by 2018.

Default could happen “at any time,” he said.

Glossop agreed, saying, “both PDVSA and the government could fall into default by the end of the week unless they settle recently missed coupon payments totalling over US$500 million.”

So far, the Maduro government has done everything possible to avoid default by putting priority on debt payments to the detriment of imports of food or medicine.

The government’s debt restructuring efforts also are compromised by political circumstances: Maduro has entrusted the task to his vice-president Tareck El Aissami, who has been sanctioned by Washington for corruption and ties to drug trafficking.

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The only hope of ending the crisis is to change the government, said Robert Kahn, a professor at American University in Washington.

“The current government is almost impossible to work with,” he said. The country will “need to change the leadership of the government to have a government that is acceptable to the West and (willing) to work with the West.”

In the absence of change, Maduro will have difficulty convincing creditors since US sanctions prohibit any citizen and any US bank from buying new bonds or negotiating agreements with the Venezuelan government or PDVSA.

If Russia or China, Venezuela’s two main creditors, were to come to Maduro’s rescue, the markets would reject any non-dollar bonds authorised by Venezuela’s Constituent Assembly because the international community does not recognise that pro-Maduro body.