Dimitra DeFolis explains in a Barron’s column why Russian and Chinese efforts to prop up the Venezuelan economy are likely to have no more than a short-term impact.
It was Russia to the rescue as Venezuela slipped into default on Nov. 13 for not paying two U.S.-dollar debt obligations on time. After the Venezuelan government said it had offered bondholders the chance to renegotiate on Monday—the offer was short on details—credit-rating agencies declared the country in selective default. But all is not lost: A default can be cured the minute the government makes a late payment.
Two days later, the Russian finance ministry declared that it will allow Venezuela to stretch $3.15 billion in debt repayments over 10 years. Another foreign lender, China, said Venezuela “has the ability to properly handle” the debt crisis through “consultation.” …
… That isn’t to say everything is wonderful. Few are fans of President Nicolas Maduro, who has squelched the elected opposition. Social crisis remains a big risk as Venezuela’s debt grows larger and its cash pile shrinks. More defaults are likely in “months, not years,” says Siobhan Morden, head of Latin America Fixed Income strategy at Nomura Securities. S&P Global sees a 1-in-2 chance of another default.
The bears also worry about Venezuela’s dependence on oil. Venezuela has few resources to invest in future production, U.S. sanctions could curtail future revenue, and oil’s price 10 years hence is a big unknown. Another concern: Russia and China, which have made loans in exchange for oil, are likely to challenge the jurisprudence governing debt restructuring. “What is going on is more dramatic than people will admit: The Russian and Chinese way of enforcing law is very different than the U.S. way in the resolution of a restructuring,” says Robert Savage, owner and editor of Track Research, a Connecticut-based macroeconomic newsletter.
