If politics makes strange bedfellows, economic crisis makes even stranger ones. Venezuela is already tens of billions of dollars in debt to China and uses half of its oil shipments to that country to pay down existing debt...
For a nation that imports 80% of its consumer goods and depends on oil for 95% of its export earnings, it should be no surprise that Venezuela is in serious economic trouble over plummeting oil prices. Falling export revenues pose a serious problem for a country that has been using up its limited international reserves at a worrying pace, with a 25% drop in reserves in the past three years.
This is prompting some unusual moves, including an announcement by Venezuela's central bank that it will be adding diamonds and other precious stones to its reserve holdings and a recent $4 billion loan from China which it put directly into its reserves.
With their latest pleas to OPEC to cut production falling on deaf ears, President Maduro is now attempting to throw the kitchen sink at the problem, including slashing 20% of “unproductive” spending from the budget and “perfecting” the nation's foreign exchange system. Still, it's extremely unlikely to make much of a difference. Barclays is now forecasting a 6.2% GDP contraction for the country next year along with 120% inflation.
If politics makes strange bedfellows, economic crisis makes even stranger ones. Venezuela is already tens of billions of dollars in debt to China and uses half of its oil shipments to that country to pay down existing debt, so an increasingly desperate Caracas is looking for other economic lifelines. As a result, they've turned to Goldman Sachs. They are working on a deal to sell Dominican Republic and Jamaican debt held by Venezuela at a deep discount as bonds to investors, brokered by the vampire squid. No deal has been struck yet.
The nation's economic woes are taking their toll on business, with Ford and GM announcing a combined $710 million write-off for Venezuelan operations earlier this year and Goodyear and Energizer issuing warnings about the nation's exchange rate. Add to this the recent social and political turmoil in the country and it seems there is a perfect storm of conditions pointing toward the threat of sovereign default and political upheaval in the coming years. Capital Economics predicts a Venezuelan default is “more likely than not” in the next two years, with the first big test coming next September when $5 billion of debt becomes due.
All of this culminated in a meting of money managers at Cleary Gottlieb Steen & Hamilton LLP's Manhattan offices last week to discuss the potential fallout of a default. The Manhattan law firm should know a thing or two about sovereign defaults; they represented Argentina in two previous defaults of their own. The meeting reflected investors' concerns about the ability of the Venezuelan government (which hasn't defaulted on its debt in decades) to make good on existing bonds, prompting questions about whether the country's US-based gas stations could be seized in the event of a default or whether the producer could be restructured as an empty shell to dodge bondholder claims.
Yesterday morning Venezuelan bonds fell to their lowest prices in 16 years. A rally in 5Y CDS and a surge in 1Y CDS also indicates that bondholders are unwinding their positions and taking some profits before the inevitable collapse. For Venezuela, this may just be the beginning of the biggest economic crisis the country has faced in decades. For investors, this may be a good time to steer clear of Venezuelan debt...especially if it's brokered by Goldman Sachs.