I’ve always considered sovereign debt to be as much about politics as debt.
The limits on how agreements are enforced, and the reality that the sovereign entity has obligations to its citizens that are always going to be more compelling than those that come from a bond indenture or a loan agreement, mean that the analogy to corporate or will get you only so far.
Venezuela seems as if it is about to illustrate this in a big way. The country has a large debt stock of about $125 billion, with about a quarter of that coming due in the next few years. A payment of $10 billion is due this year.
The country is heavily dependent on oil to raise external funds, yet the price of oil is down sharply. that because of low oil prices, Venezuela will raise only about $20 billion from oil sales this year.
Half of that money is already pledged to bondholders, so the country will continue to struggle to balance its budget, especially given that the budget was not balanced even when the price of oil was at $100 a barrel. Compounding financial woes, inflation , to put it mildly.
According to the data service provider Markit, spreads on on Venezuela were trading north of 6,200 basis points last week, as compared with about 19 basis points for the United States or even 1,100 basis points for Greece. No wonder the country’s debt is trading at a big discount to face value.
The question is, how can Venezuela buy itself some time? A workout with its creditors would seem to be a good start, but there will be challenges. First, the debt has been issued both by the country and by the state-controlled oil company. That sets up the potential for intercreditor disputes about who should get paid when, and who should suffer when the debt is restructured.
Second, it has been reported that the outstanding debt does not contain “collective action clauses.” These clauses are intended to avoid an Argentina-style holdout problem by binding all bondholders to a deal agreed to by a specified majority of bondholders. Because Venezuela’s debt lacks these clauses, any workout is subject to being sideswiped by litigation in New York.
And that might make bondholders hesitant to work with Venezuela in the first place. Why agree to take a “haircut” if some other bondholder will get more by litigating? And the country has , especially those tied to oil production, that might make litigation even more attractive than it was in the case of Argentina.
Finally, it all comes back to politics. Venezuela is now , with the president from one party and . If there is going to be a deal with bondholders, they will have to work together. That seems .
In short, it sure seems like we are heading for a mess.