Venezuela is about to default, finally. Will it affect Indian markets?
The Venezuelan crisis had worried us throughout the year. We listed it among the top 10 geopolitical risks the world faces in 2017. Venezuelan President Nicolas Maduro has finally admitted that his government can’t pay its $65 billion debt. State oil company PDVSA (more like the Government’s finance arm) made a $1.1 billion payment last Thursday but Maduro said there would no more. The country now has a measly $10 billion left in the bank.
Maduro wants a ‘refinancing and a restructuring of the external debt’ that the country owes to investors in US, Russia and China, political jab for ‘begging for a loan waiver’.
History shows us that this does not end well. Take the Argentina Crisis of 2001 as a case study. Argentina defaulted on it’s debts in 2001 and a legal hiatus that went on for 15 years.
“I decree a refinancing and restructuring of external debt and all Venezuelan payments. We’re going to a complete reformatting. To find an equilibrium, and to cover the necessities of the country, the investments of the country”. — Venezuelan President Nicolas Maduro
Even if creditors agree, how? Any debt restructuring is complicated by US sanctions imposed in August, which block American financial institutions and investors from buying new Venezuelan bonds. Maduro has appointed Vice President Tareck El Aissami to lead the restructuring efforts. There’s one more problem: he can’t do bussiness in the US. Let that sink in.
The guy they chosen to negotiate with the US has been accused of drug trafficking by the US Treasury.
Almost no options are open. Venezuela could seek to get around the US sanctions by issuing restructured bonds in other currencies, approval for which would come from the Constituent Assembly, which the US, Canada, EU and Latin American countries do not recognize because there have been cries of fraud and a rigged election.
Ricardo Hausmannm, former minister of planning of Venezuela says that a broader economic restructuring plan backed by the International Monetary Fund is needed to rescue the country. While the IMF has had no official relationship with Venezuela since the country broke ties in 2007, the fund has been following the crisis closely because of its impact on neighboring South American countries. IMF estimates that the country would need $30 Billion a year to bail out the economy.
A meeting with Government officials and it’s creditors such as Goldman Sachs, Russian and Chinese authorities has been called on Nov 13th. A default could see investors try to lay claim to PDVSA assets, including tankers, oil in shipment and subsidiaries such as the Citgo refinery in Houston.
Is this a big deal for Indian financial markets? No
A loss of production would be inconvenient for the refiners accustomed to relying on the country’s supplies and damaging to the international companies involved, such as Repsol and Chevron, but globally, any such shortfall could soon be matched by increased supplies from elsewhere. Several OPEC producers — including Nigeria, Iraq, Algeria, and Iran — are itching to push their exports up. US sanctions on Venezuelan imports would be disruptive but the market would soon adjust. We see some volatility in crude prices but our stock markets will be immune.
