On the Announcement of “Refinancing and Restructuring” the Foreign Debt

[This post originally appeared in Spanish on Prodavinci.com. Translated and published with permission of the author.]

Luis Vicente León

The president’s simultaneous announcements that the government would seek to restructure Venezuela’s foreign debt, would pay the bond that came due on November 3, and would continue to honor the nation’s financial commitments, presents several financial ambiguities as well as operational difficulties.

There is a clearly a contradiction in announcing a process of refinancing, a process of restructuring and continuing to pay the debt. But perhaps the government has an objective that should not be overlooked: a search for allies in Washington, DC, to try to loosen U.S. sanctions in order to move forward with a refinancing (not restructuring) of Venezuela’s debt. Indeed the worst scenario for the government and its creditors would be a default.

Let’s take this in parts. The president said he had ordered a debt restructuring for which he appointed a high-level commission, headed by the Vice President Tareck El Aissami. In the same speech, he guaranteed that the country would continue paying its debts. This is clearly a conceptual error. Under crisis conditions and payment problems, the debt could be subject to two different strategies: either refinancing or restructuring.

Refinancing is the result of a negotiation in which the debtor offers alternatives to exchange the current debt for new debt with different conditions, in order to avoid a failure due to inability to pay. For refinancing to happen, it must be accepted by all parties and become a voluntary debt swap.

While negotiating a debt refinancing, the debtor does not stop paying its commitments. If it does, the negotiation is over and automatically a cessation in payment occurs, which means a default, opening the conditions to sue, seize, and start a second action—different from the first—namely, the restructuring of the debt. A restructuring process is not voluntary but compulsory, with much more serious impacts on the economy of the country and with the emergence of new actors (lawyers and high performance funds) that try to take advantage of the situation, while the original holders incur significant losses on their investments.

As you can see, it is not consistent to talk about restructuring while paying, nor to talk about a decreed or compulsory refinancing. One possibility is that president Maduro is trying to lay the groundwor for a negotiated refinancing. It is an aspiration more than an action. But that aspiration faces a concrete obstacle. Under present conditions, with a set of financial sanctions applied by the United States, the possibility of refinancing is very low. These sanctions prevent the American financial system and American businesses from acquiring new Venezuelan debt. The refinancing of old debt requires exchanging it for new debt, and the U.S. sanctions would prevent (or make dramatically more difficult) that exchange.

Here is my central hypothesis. The Venezuelan government could be trying to tie the relaxation of the U.S. sanctions to the need for debt refinancing, in which not only the Republic of Venezuela is interested but also the international financial market and large North American investors. The government, with this announcement that made the market shudder without executing a concrete default action, could be looking to create an army of allies within the United States itself to undertake the political lobbying needed to seek relaxation of the sanctions on Venezuela and open possibilities for an orderly refinancing in the future.

In terms of the political chess game, this would be an elegant opportunity for the Trump administration to turn sanctions that punish into sanctions that pressure for political negotiation: sanctions that could be reversed, tied to some concession by the Maduro government. These might include guarantees regarding an electoral system which might be recognized by the international community and accepted by all relevant political actors.

I do not know whether the Maduro government will be able to achieve its objective, nor how investors, nor the United States government react. But with this move the Maduro government seems to be betting on a substantial increase in its capacity to pressure and lobby within the home of its enemy, not to mention on the possibility that many actors with internal information on Venezuela would acquire Venezuelan debt, which will eventually be paid, at prices based on the fear of default. We do not know for sure what is behind the announcement, but I think it is important to realize that there are reasons behind every move and they should be studied.