It’s only been hours since the International Swaps and Derivatives Association formally declared the Venezuelan government and the state-owned oil company PDVSA in default for not having paid their debts on time. Yet, it’s been years since many economists foresaw this scenario.
It should not have come as a surprise to anyone, and in particular to those bondholders that have been financing this regime for a while now, making huge profits.
{mosads}It should take a government a lot of effort to convert an oil-rich country, once the fastest growing economy in South America, into what is probably the most distorted economy in the world, experiencing one of the worst humanitarian crises the hemisphere has ever seen and now unable to repay its debt commitments.
We have to be clear on something: The inability of the Venezuelan government and of PDVSA, to repay over $100 billion in foreign debt is not the result of the drop of oil prices. Rather, it’s the result of almost two decades of mismanagement, populism and corruption at the highest levels of government. This catastrophe is the result of what the late President Hugo Chavez coined “the socialism of the 21st century.”
What’s next for Venezuela? The financial default will make things worse for Venezuelans, and shortages will only increase. Even if Russia has agreed to restructure about $3 billion of debt, that’s still a tiny amount of all the debt the country has accumulated.
Certainly, the sanctions imposed by the Trump administration will make it almost impossible for President Nicolas Maduro and his inner circle to fulfill their recently expressed desire to restructure the debt.
There is very little possibility of fixing this mess without a change of government, and that seems very remote at this point, as the regime effectively controls all the state’s institutions, including the military, the supreme court and the electoral council.
But there is one card on the deck that the weakened opposition could use in its favor: The current constitution states that any issuance of sovereign debt (and therefore, any debt restructuring) has to be approved by the National Assembly, which the opposition controls.
Thus far, the government has shown little interest in acting in accordance to the constitution. But when it comes to restructuring the debt, this little detail could be an important Achilles’ heel. No bondholder should accept any deal not officially approved by the National Assembly. Otherwise, they run the very real risk that the restructured debt would not be recognized by any future government down the road.
Of course, the government can (and probably will) use its Constituent Assembly, which gave itself powers to rule over all other institutions while it supposedly rewrites a constitution, to approve a restructuring deal on behalf of the National Assembly.
But as long as there is no new constitution with new rules, bondholders must demand from the government that any sort of restructuring must be approved by the democratically elected National Assembly that took office in early 2016.
This demand would increase the almost non-existent bargaining power the opposition has in any type of negotiations with the government in terms of assuring fair electoral conditions, as the presidential elections loom in 2018.
This default could also bring an opportunity to the Trump administration to exercise smart pressure on the regime by saying that the sanctions on new debt issuance could be lifted if a restructuring bill is passed by the National Assembly and if the government accepts international monitoring of the upcoming presidential elections.
While it is more realistic to believe that this financial default won’t increase the likelihood of a return to democracy in Venezuela, the opposition and the international community — including the bondholders — could use it as an opportunity to exert pressure to the regime.
One thing is for sure: Without the bondholders’ agreement, the regime, regardless of how much more authoritarian it can become, won’t be able to restructure any debt.
Given that, for years, they have indirectly financed a regime that destroyed what was left of democracy while inflicting severe pain on Venezuelans (in what now appears to be a very bad business decision, too), this is an opportunity they have to make up for having turn their blind eye during all these years.
Dany Bahar is a David M. Rubenstein fellow in the Global Economy and Development program at the Brookings Institution. An Israeli and Venezuelan economist, he is also an associate at the Harvard Center for International Development.