The Debt Factor in Washington–Caracas Relations

By Misión Verdad  –  Sep 15, 2023

Of late, the international financial sector has been paying increased attention to Venezuelan bonds, which have been trading at between 10 and 11 cents per dollar, compared to 8 to 9 cents a few weeks ago.

The price of debt bonds issued by Petróleos de Venezuela, S.A. (PDVSA) and the Central Bank of Venezuela (BCV) today have negligible values compared to those of previous years.

In 2016, in the midst of the first informal blockade actions against the Venezuelan economy, the performance of these bonds—which had a coupon of 9.25%—exceeded 28%, a figure that, at that time, quadrupled the yield of Argentinian bonds. This occurred in a period of “uncertainty” and was also mediated by negative risk ratings against the country despite compliance with debt commitments.

In other words, Venezuelan bonds were trading at a high market value given the support that the Venezuelan government provided the bonds by fulfilling its debt commitments.

That same year, these bonds cost between 70 and 80 cents on the dollar despite the fact that there were already serious impacts on Venezuelan finances due to declining oil prices and internal economic sabotage. A study by the Reuters agency described the bonds as “impressively profitable.”

However, in August 2017, Donald Trump’s government issued a series of sanctions against the Venezuelan economy, vetoed the country from being able to negotiate its existing debt, and prohibited any financial entity linked directly or indirectly to the United States from carrying out business involving debt mechanisms issued for Venezuela.

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Then, President Nicolás Maduro rebuked the measures through predictions that ended up being true:

“They directly affect the holders of bonds or financial debt instruments in the United States. Why do they do it?” asked President Maduro. “Because the United States government and the opposition have sought for Venezuela to fall into default, for Venezuela not to pay… The bonds burned in their hands.”

In effect, the blockade measures have prevented Venezuela from financing its economy through oil exports, have torpedoed its relationship in the international financial system, and have made it impossible to manage its debt. As a consequence, the country could not pay off its debt commitments and Venezuelan bonds fell into default, plunging their value to minimal prices.

Expectations of Caracas–Washington dialogue 
Various agencies specializing in economic issues have recently reported that the prices of Venezuelan government bonds have risen in recent weeks as investors speculate that the government of President Nicolás Maduro is approaching a diplomatic breakthrough that could lead to an easing of US sanctions, according to the Financial Times (FT).

Now, bondholders say leaks from Washington pointing to progress in secret, long-running talks with Caracas have helped spark a rally in bonds:

“The US government would like to reach an agreement with Maduro because this would resolve two issues related to President Biden’s re-election: the migration of Venezuelans to the United States and the Russian-Saudi attempts to squeeze the oil market,” a bonds stakeholder told FT.

Hans Humes, CEO of emerging markets investment firm Greylock Capital, explained to the British media that speculation regarding progress in negotiations between the United States and Venezuela had driven up prices in recent weeks:

“We know [the talks] could break down at any time, but the interests of the two governments have been aligned for a long time,” he said.

The question of interest
Although the debt issued by PDVSA and the BCV currently does not pay regular interest, some buyers are interested in acquiring it to profit after an eventual restructuring of the country’s bonds, that is, in a process in which Venezuela decides to cancel its debt to those who own the bonds. However, this would depend on a negotiation between the Venezuelan government and the bondholders.

From 2019 until 2021, during the so-called “pseudo-interim government” headed by Juan Guaidó, which tried to mediate the situation in Venezuela against the bondholders in a maneuver that sought to obtain important national assets frozen abroad to supposedly respond to the debt creditors.

In effect, they managed to use US $70 million belonging to Venezuela to pay the interest on the PDVSA 2020 bonds. However, the US government did not authorize further disbursements.

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Guaidó allegedly coordinated with several firms and stockbrokers that traded in Venezuelan bonds, pressing for a release of assets. This operation, although it was unsuccessful, caused the bonds to momentarily rise in price before they changed hands.

Subsequently, both the “interim” and the so-called “AN 2015” have issued some pseudo-administrative and pseudo-legal measures to extend the legal term of the bonds.

During those years, rumors spread, supposedly based on “reliable information,” that the US government would authorize the use of assets to pay bonds.

In another line of thinking, the scenario of a “green light” that through licenses authorizes transactions with Venezuelan bonds in the US market remains distant.

Even a relaxation of the US trade ban would likely result in large increases in bond prices, as it would open them up to demand from a much broader group of investors. Perhaps this scenario does not have the support of the Venezuelan government because its economic conditions do not apply to assuming debt commitments on more expensive terms.

Nick Lawson, chief executive of London brokerage firm Ocean Wall and a holder of Venezuelan bonds since late 2021, told the FT that he believed debt issued by the South American nation could rise much higher:

“Cuba is trading at 6 cents on the dollar… Lebanon, which has no natural resources, is trading at 11 cents. We believe that, in a three- or four-year perspective, we could recover 75 cents. The asymmetry between risk and reward is convincing.”

A source “close” to the alleged talks insisted to the FT that positive news could appear in the coming weeks: “There is a possibility of reaching an agreement on a broader basis,” he said, explaining that this would consist of a series of steps taken by the United States and Venezuela towards the normalization of relations, instead of a single announcement.

The apparent active negotiation between Caracas and Washington has not been formally confirmed by the countries’ governments and, so far, everything remains in the realm of rumors and supposedly “privileged” information.

Nor is it the first time that conversations between Washington and Caracas have been cited, resulting in a temporary impact on bond prices.

Various stockbrokers have sold Venezuelan bonds in the “junk” category to holders in the Asian world—Western and Eastern—and, in many cases, betting that prices will be inflated based on the prospects of a détente has been applied.

According to the US outlet Bloomberg, last March, Claudio Zampa, founder and manager of Switzerland’s Magnart Capital Management Ltd, purchased Venezuelan bonds in default at a very low price.

Zampa said that, deep down, there was a great deal of interest in Venezuelan bonds, as they could rise in price because, supposedly, “there was an agreement already in force between Washington and Caracas, reached in February” and that, at that time, the agreement was about to be announced.

Indeed, bonds had risen to almost 10 cents on the dollar at the time, but then, their price fell in the absence of any official announcements about agreements. The entire affair appeared to constitute a false information maneuver.

Furthermore, the Venezuelan debt markets are at the center of negotiations that could alleviate the US sanctions scheme against Venezuela, with winds both in favor and against.

 

 

(Misión Verdad)

Translation: Orinoco Tribune

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