Central bank data shows Venezuela is in ‘stealth default’

Data published by the Central Bank of Venezuela has revealed the country is in default on its foreign debt payments. 

As part of an overhaul of its website, the central bank published a large amount of historical data relating to reserves and financial accounts.

The new website included information on the central bank’s external debt repayments, which was spotted by Russ Dallen of Caracas Capital, who follows Venezuelan debt closely.

According to the data, Venezuela’s debt repayments have dramatically decreased since October 2017 – plummeting from $244 million in September to $83 million in October.

Caracas Capital estimated that the Venezuelan state had debt repayment obligations of $465 million in October.

“[President Nicolás] Maduro has engaged in a ‘stealth default’, and there has been little fuss,” Steve Hanke, professor of applied economics at Johns Hopkins University tells Central Banking.

Hanke believes creditors have not yet revolted because of the “US Treasury’s war machine-imposed sanctions” make it difficult for them to “kick up a fuss”.

The debt payments decreased further in November and December to $28 million and $23 million respectively.

The data covers payments of sovereign debt only and excludes obligations by Petroleos de Venezuela (PDVSA), the state-owned oil and gas company, and other state entities. “This proves that Venezuela is deliberately hoodwinking bondholders,” Dallen told the Financial Times on April 9.

Goldman paid

However, recent reports suggest one of Venezuela’s creditors has been paid. According to sources who spoke to the Wall Street Journal, Goldman Sachs received $90 million April 6 – payment due on “hunger bonds” it bought last year.   

In June 2017, in an attempt to stem the dollar shortage, Maduro’s government organised a steeply discounted sale of bonds issued by the PDVSA in 2014.

Both Goldman Sachs and Nomura Securities participated in the sale, and subsequently faced fierce criticism for buying debt at knock-down prices from a regime known for its human rights abuses.

Both banks bought debt at 70% discounts. Nomura bought 100 million dollars’ worth at the cost of $30 million and Goldman bought $2.8 million at 31 cents on the dollar. The purchased debt was due to mature in 2022.

According to the Wall Street Journal, Maduro’s government paid Goldman Sachs back in November 2017, but the money was held up in a clearing house over concerns it might be in violation of US sanctions.

Pedro Tuesta, senior Latin American economist for Continuum Economics, agreed there were doubts over whether the payments were legal.  

Goldman Sachs was not available for comment at the time of publication.

Debt default

Venezuela has not been able to refinance its debt effectively for a number of years. This is due in part to US sanctions, which prevent US institutions from acquiring newly issued Venezuelan debt.

As a result, the PDVSA is prohibited from carrying out swap transactions – where it would exchange maturing bonds for ones that come due in the future – as financial institutions domiciled in the US would be unable to acquire the new debt.

“The main problem for creditors is that the US sanctions are not allowing Venezuela to get financing to replace any payment and PDVSA cannot generate hard currency,” Tuesta says.

“Venezuela has no incentive to pay. Also creditors have very few assets to target if they decide to make a fuss,” he adds.

President Maduro announced on November 3, 2017 that the country would restructure and refinance its debts after making one last payment on a bond owed by the state-owned oil company PDVSA.

In mid-November 2017, Standard & Poor’s, Moody’s Investors Service and Fitch all declared Caracas had failed to pay international investors the interest due on $200 million in bonds within a grace period of 30 days. Venezuela was officially in default.