By John Detrixhe
November 14, 2017
For a country whose people are running short on food and medicine, Venezuela has kept a surprisingly good record of paying its debts on time. But this week, one of the country’s last vestiges of normalcy was erased when credit rating firm Standard & Poor’s said the country was in default. Though it has teetered on the brink for years, Venezuela recently failed to make $200 million in coupon payments on bonds worth $5 billion owed to foreign creditors, according to S&P. For a country whose people are running short on food and medicine, Venezuela has kept a surprisingly good record of paying its debts on time. But this week, one of the country’s last vestiges of normalcy was erased when credit rating firm Standard & Poor’s said the country was in default. Venezuelans wait for hours to buy food, but creditors at the restructuring meeting were given gift bags filled with state-produced chocolate and coffee, according to Bloomberg. It lasted about 30 minutes, and vice president Tareck El Aissami, Venezuela’s debt negotiator, mainly used the meeting as a chance to complain about Donald Trump. In the past, despite the hardships its people suffer, Venezuela has used its foreign reserves to make bond payments. But those funds are running low—the country has less than $5 billion in usable reserves, compared with $16 billion in 2015, according to S&P.
One reason Venezuela has been surprisingly steadfast in making bond payments is because the government needs to protect the credibility of state-owned oil company Petróleos de Venezuela (PDVSA), its last lifeline for income. Venzuela, which has the world’s largest oil reserves, needs that oil money to service its debt as well as to pay for subsidies that support some of its poorest citizens. PDVSA, in turn, relies on credit lines from international banks to finance oil production. Its continued functioning is one of the few things helping the government—which has decimated its economy through mismanagement—cling to power. Now, as US sanctions cut deeper into what’s left of the economy, it’s increasingly unclear how Venezuela will support itself. The country agreed on terms with Russia for restructuring about $3 billion debt, but it still owes more than $50 billion on bonds held by other creditors. In the meantime, S&P thinks there’s at least a 50% chance of another default in the next three months.
