The Daily Update - Venezuela: The ‘Land of Grace’.. periods and recurring defaults

When Columbus first set eyes on what is now Venezuela from the Gulf of Paria he described it as ‘heaven on earth’ and gave it its enduring nickname of the ‘Land of Grace’. But 500 years on and the country’s debt problems are as deep, and its list of economic woes as long, as the Orinoco River. The only grace talked about is the grace period on its mountain of debt - and yesterday’s expiration of one on a coupon payment - putting the country once again in ‘default’ (although the International Swaps and Derivatives Association’s have yet to formally declare it).

Since and including the Latin American debt crisis in 1982, Venezuela has defaulted 6/7 times – thus averaging one default every 5 years or so. The last one, before the present, was in 2004 so actually the recent default-free stint of 13 years is above recent historical averages and has surprised many who have been waiting for former President Hugo Chávez and now President Nicolás Maduro to default on their sovereign debt and/or the debt of PDVSA the state-owned oil company. But the country has continued to trudge through the perennial penalties of disastrous economic and political mismanagement that culminated in the 80s, compounded now with falling oil production and oil prices half what they once were. It now looks like even such trudging is no longer sustainable.

The country has fallen just about as far as a country could, in terms of economic opportunity and investor hopes, since the golden economic boom from when the country had the highest GDP per capita in Latin America in 1935 and up to the ‘80s when it was the darling emerging market opportunity and optimistically Aaa rated by Moody’s from 1976 to 1983 (although Moody’s don’t disclose ratings prior to ‘87 for the country on Bloomberg these are easily accessible in historical papers). Then two decades of economic shocks, political crises, deadly riots and attempted coups crippled the country and investors’ dreams. It now stands rated effectively for default across all major rating agencies, not just reflecting the failed payment but with the expectations that Venezuela will likely also be unable to pay going forward - including 5 large principals maturing in the next couple of years (>$4.85bn due before 2020, around half of which is due in the next ~12 months).

And yet Venezuela’s Maracaibo Basin still has over 315 billion barrels of oil reserves according to some estimates which is almost 4x that of Russia or 40x that of Mexico. This makes Venezuela the world's largest known holder of proven oil reserves and continues to be one of the world's leading exporters. But adding to its woes, production on a country level has fallen sharply in the past couple of years from a multi-year average of 2.35mbpd (2012-2015) to just 1.95mbpd, along with the halving of oil prices since the beginning of 2015. This sharp drop in oil revenue, along with longstanding internal political impasse, hyperinflation and international sanctions - hindering any possible chance of restructuring and refinancing their debt - have all finally and predictably come to a head. Moreover, the EU has just approved economic sanctions and an arms embargo on Venezuela following the US Treasury Department’s further sanctions for the country last week… Still we’re not quite at the stage of Britain, Germany and Italy imposing a naval blockade as in the Venezuelan Crisis of 1902 and President Cipriano Castro’s refusal to fulfil foreign debts.

It’s taken over 16 years for Argentina to begin working-off the pains and complications of its 2001 default and their situation then was arguably better and simpler than that of Venezuela’s. And with many major debt deals with China having seniority over other Venezuelan bondholders they should expect even larger losses: that is possibly after waiting a decade or two to recover anything.