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Venezuela in 'selective default': S&P

Wednesday, November 15, 2017

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CARACAS, Venezuela (AFP) — Venezuela faced the first of what could be a c ascade of defaults on its US$150-billion foreign debt yesterday as Standard and Poor's declared the crisis-torn South American country in “selective default”.

S&P's move came after Vice -President Tareck El Aissami met with creditors in Caracas Monday, but offered no way out of the impasse.

In the meantime, China said its massive financing of Venezuela was “proceeding normally”, and Russia was expected to sign an agreement as early as Wednesday to restructure US$3 billion of Caracas's debt, according to sources in Moscow familiar with the matter.

Beijing and Moscow have emerged as Venezuela's most reliable sources of funding, with China owed US$28 billion and Russia US$8 billion.

S&P declared Venezuela in “selective default” after it failed to make US$200 million in payments, on two global bond issues, by the end of a 30-day grace period on November 12.

“We have lowered two issue ratings to 'D' (default), and we lowered the long-term, foreign currency, sovereign credit rating to 'SD' (selective default),” the agency said, adding that US$420 million in payments on four other bonds were also overdue, but still within the grace period.

Venezuela's debt crunch comes as no surprise, as the government cuts back on imports to service its debt, leaving the population struggling with shortages of food and medicine.

Caracas has less than US$10 billion left in hard currency reserves, but must make US$1.4 billion in debt payments before year-end, and another US$8 billion next year.

CREDITORS MEET

President Nicolas Maduro has formed a commission to restructure Venezuela's sovereign debt and that of state oil company PDVSA.

But participants in a first meeting in Caracas on Monday said officials had come up with no concrete proposals for restructuring the debt.

“They didn't give any concrete details on their plans, on what they hope to get,” Geronimo Mansutti, from the Rendivalores brokerage, told AFP.

About 70 per cent of Venezuelan bond-holders are North American, according to government figures.

S&P said there was “a one-in-two chance that Venezuela could default again within the next three months”.

“We would very likely consider any Venezuelan restructuring to be a distressed debt exchange and equivalent to default, given the highly constrained external liquidity,” it said.

Vice-president El Aissami blamed US sanctions for delays to Venezuela's debt repayments.

Restrictions include a ban on US entities buying any new Venezuela debt issues — usually a required step in any restructuring.

The US has designated vice -president El Aissami himself, a drug kingpin with whom US entities are barred from dealing.

DECISION POSTPONED

A committee of the International Swaps and Derivatives Association (ISDA) is weighing whether holders of PDVSA debt with default insurance — credit default swaps — can collect payment.

The Maduro government had said it would make a US$1.2-billion payment on a PDVSA bond on November 2, but it was unclear if the funds ever reached creditors.

A committee of 15 financial firms met in New York “to discuss whether a failure to pay credit event had occurred” with respect to PDVSA, but ended up postponing a decision until Tuesday.

Adding to the pressure on Maduro was the European Union's announcement of sanctions.

MADURO DEFIANT

But Maduro remains defiant, insisting on Sunday that his country would “never” default and pointing to ongoing negotiations with China and Russia. Nevertheless, his options are very limited.

A default can be declared either by the major ratings agencies, big debt-holders, or by the government itself.

Maduro is also under fire internationally for marginalising the opposition, which controls the parliament, and stifling independent media.

The US called an informal meeting of the UN Security Council, where US Ambassador Nikki Haley slammed Venezuela as an “increasingly violent narco-state” that poses a threat to world security.

Permanent council members Russia and China boycotted the meeting, as did non-permanent members Bolivia and Egypt.

Venezuela's envoy to the UN, Rafael Ramirez, called the meeting “illegal” and a “hostile act of interference” by the US.

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