Led by an accused drug kingpin and hindered by U.S. sanctions, the Venezuelan debt restructuring negotiations set for next week in Caracas seem destined to fail, analysts said.
And that has some Latin American analysts wondering whether that was the plan by President Nicolás Maduro’s government all along.
Few U.S. investors — who hold at least 60 percent of the Venezuelan bonds — are expected to attend Monday’s meeting called by sanctioned Vice President Tareck El Aissami, though financial markets are desperately seeking information on the government’s plans amid worries that the country is about to default on its massive foreign debt.
“The way they are being set up, the chances of success they have are almost nil,” Caracas Capital Managing Partner Russell M. Dallen said, of the Caracas talks. “It is almost as if the government set them up as an excuse to fail.”
Dallen and other analysts worry that the negotiations are a prelude to a default on Venezuela’s $180 billion foreign debt, a perception that gained strength in the markets after Maduro announced last week that he had “decreed a refinancing and restructuring of all foreign payments.”
Given that sanctions introduced by the Trump administration ban U.S. investors from buying newly issued Venezuelan bonds, the chance of a voluntary debt swap operation — which would allow investors to swap near-term debt for debt that matures later on — seems highly unlikely, Dallen said.
But it is Maduro’s appointment of El Aissami as the man in charge of restructuring the debt that makes the process a “non-starter,” he said.
The vice president was sanctioned in Februrary under the Kingpin Act by the U.S. Treasury, which accused El Aissami of “playing a significant role in international narcotics trafficking.” At least $500 million in assets belonging to him have been seized in the U.S. alone, and investors are prohibited from dealing with him.
“I am not clear what the thinking was. … Maybe they have not understood the wider ramifications of how restructuring works, and what the mechanics are,” said Stuart Culverhouse, chief economist and global head of research at investment bank Exotix Capital.
“Even investment banks would have to tread carefully given the U.S. sanctions, in terms of providing advice and dealing with particular individuals that may be in the sanctions list. This would be very tricky,” he said from London.
The U.S. Treasury agrees.
In an announcement issued Wednesday, it warned bondholders that meeting with El Aissami — and also with fellow lead negotiator Simon Zerpa, who also faces U.S. sanctions for alleged corruption — would be “problematic” and “could lead to stiff penalties.”
On Friday, in a development that escalated market fears, the state-run utility company Electricidad de Caracas (EDC) was declared in default by its trustee after a 30-day grace period ended on its past-due payment of $27.6 million.
Investors had been waiting to see what would happen with the EDC bond issue, believing it could be a signal of greater trouble to come.
But while the need to restructure now may be a necessity, the process to get it done looks like an uphill battle.
Diego Moya-Ocampos, a senior analyst for the Americas at London-based economic research group IHS Markit, said three things must take place for any debt restructuring process to have a chance of success.
First, it must be accompanied by a credible plan to overhaul the economy, which in essence would do away with the socialist policies that have been implemented since 1999. That’s something the Maduro regime has given no indication it might be willing to do, Moya-Ocampos said.
Second, any restructuring agreement must be approved by the opposition-controlled National Assembly, which also looks very unlikely, he said.
Third, negotiators need to find out if the U.S. sanctions leave enough room to maneuver for debt restructuring to take place, he added.
As analysts wonder whether the negotiations are designed to fail, several theories have emerged about the possible intentions of the Maduro government.
The government could be planning to blame U.S. sanctions if the default occurs, and then use money it had been paying in debt service to shore up the Maduro regime as well as possibly addressing some of the country’s growing social ills, Moya-Ocampos said.
But the markets also are not ruling out the idea that the announcement is a “head fake,” similar to what Ecuador did in 2009, when it sent its bonds crashing so they could be purchased at fire-sale prices, Venezuelan economist Alexander Guerrero explained.
If that is the intention, “then the administration is seeking to benefit regime cronies, allies and front men, who would buy the Venezuelan bonds [at] 20 cents on the dollar and then eventually be paid at 100 percent of face value,” Guerrero said.
Yet, the sheer size of the Venezuelan debt makes that idea hard to take seriously.
“It is unknown if Venezuela will ever be in condition of repaying the totality of its debt at face value,” he said.
A third possibility discussed in Venezuelan circles is that the Maduro regime is following a strategy to induce a default and worsen already harsh economic conditions there, giving Maduro an excuse to impose tougher controls similar to those imposed in Cuba during the first decade of its revolution, Guerrero said.
Follow Antonio María Delgado in Twitter:@DelgadoAntonioM