Jan 29, 2019

Bond markets are driving the global split on Venezuela

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Adapted from a Bloomberg map; Map: Axios Visuals

It is tempting to paint the competing factions backing Venezuelan President Nicolás Maduro and newly declared President Juan Guaido as East vs. West or socialist vs. capitalist, but the real delineation is about the money.

On one side: Most of the official bonds, around $65 billion worth issued by Venezuela and state oil company PdVSA, are held by investors in the U.S., Canada and Europe. Almost all of those bonds have been in default since November 2017.

  • Investors in North America and Europe are largely still holding the bonds. The odds of them being paid increase greatly if Maduro is replaced as president by someone who will seek help from the IMF and look to issue debt again on global credit markets. None of that can happen until an agreement is made with bondholders.

(This situation played out perfectly for investors when Mauricio Macri was elected president of Argentina and settled almost immediately with that nation's creditors on terms that were very favorable.)

The other side: China and Russia have enjoyed an off-the-books arrangement with Venezuela wherein the nation with the world's largest proven oil reserves ships them crude in exchange for discounted payment of outstanding debts and fresh cash.

  • Maduro also has signed over portions of the country's oil industry to China and sold discounted oil to Cuba, likely in exchange for that country's armed forces protection.
  • Turkey for some time has been supplying products for food packets to Venezuelan officials. Venezuela also ships gold to Turkey and the 2 countries recently announced joint ventures for gold and coal exploration.
  • U.S. officials allege Venezuela has been sidestepping sanctions and sending gold to Iran in exchange for cash and debt relief.

These agreements would be in question under a new president who was backed by the U.S., Europe and the IMF. Iran and Russia also benefit from Venezuela's greatly reduced oil-production capacity, which props up crude prices.

Closer to home: Latin America's 2 major country alliances — Mercosur, which includes Venezuela but does not recognize Maduro, and Allianza Pacifico — have denounced Venezuela for years. Maduro's assault on democracy threatened international trade agreements and 3 million displaced Venezuelan emigrants have spilled into neighboring countries causing economic and political strain.

  • Bolivia's president Evo Morales and Mexico's Andrés Manuel López Obrador have stood with Maduro but also against a long tradition of U.S. intervention in Latin America.

The bottom line: Venezuela previously funded itself through debt financing and oil sales, but as the cost for Maduro to stay in power rose — with higher bond payments and more security — and he ran low on U.S. dollars he looked for partners who would take alternative payments. Those partners are now invested in him holding power, while defaulted creditors are invested in his removal.

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