As reported earlier, Venezuela’s state-run oil company surprised naysayers who speculated that today may be the day PDVSA finally defaults on its $842 million bond issue. In a statement, PDVSA “confirms its full solvency and capacity to fulfill its commitments, despite the economic war and the imposition of unjustified sanctions from Donald Trump,” the oil firm said in its statement.
The story is not over yet, however, as plenty of obstacles not to mention potential surprises remain, including the immediate challenge of ensuring that the cash makes it all the way into the accounts of creditors. As Bloomberg notes, in recent weeks, Venezuelan officials told investors that less-critical interest payments have gotten held up in the payment chain because U.S. sanctions on the government scared many international banks into refusing to take part in the cash transfers. There was also no reference to the $107 million in interest due. As we reported on Wednesday, the company and government have been using grace periods on more than half a billion dollars of such payments due this month, but the principal amount Friday had no such buffer. It’s next big challenge is the additional $1.2 billion owed on notes maturing next week.
“Given logistics and steps needed to get payment to bondholders, I doubt that the money will arrive by the end of today,” said Ray Zucaro, the chief investment officer at Miami-based RVX Asset Management. “Monday is more realistic, and then we will hear a big sigh of relief.”
Whatever happens on Monday, however, today was PDVSA’s day to gloat, and it did just that in an odd, angry rant reminiscent of Donald Trump’s Twitter forays. After announcing that $841 million in bank transfers for the PDVSA bond had begun, it stated that Venezuela has “consistently honored its obligations” – even if meant unleashing hyperinflation, destroying the currency, and creating general social misery – before taking a shot at “doomsayers that bet on the economic ruin of the country and attack the Venezuelan people conspiring with the world economic oligarchy with the intention of destabilizing and sabotaging the Government’s economic progress.”
And if PDVSA was gloating, the market was relieved, and PDVSA’s notes due 2020 jumped 3.5 cents to 85 cents on the dollar as of noon in New York according to Bloomberg, while the securities due next week climbed to a three-year high of 95.8 cents. Sovereign bonds due in 2027 leaped 9.6 percent to 36.9 cents on the dollar.
Ironically, as the plight of Venezuelan society gets worse by the day, bondholders win again.
To be sure, there are plenty of Venezuela watchers — including economists such as Ricardo Hausmann — who have been urging the government to stop payments. They say the debt load is unsustainable, and sending dollars to foreign investors while cutting back on imports of food, medicine and basic goods for the Venezuelan people is immoral.
Of course, the reality is that Venezuela simply can not afford to stay current on its obligations. The government and PDVSA will owe international creditors $10 billion in bond payments next year and $14 billion in 2019, according to Capital Economics. International reserves have sunk to a 15-year low near $10 billion.
As a reminder, this is a scheduled of Venezuela’s upcoming bond payments:
“It remains a question of when — not if — PDVSA and the government default,” Capital Economics analysts said in a note today. When that day comes, PDVSA’s twitter account will be quiet.
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