Venezuela on the brink of a cascade of debt defaults, as S&P declares it in ‘selective default’
Caracas — Venezuela faced the first of what could be a cascade of defaults on its $150bn of foreign debt on Tuesday, as Standard & Poor’s became the first credit agency to declare the crisis-torn South American country in "selective default".
The US agency’s action came after Vice-President Tareck El Aissami met with creditors in Caracas on Monday but offered no way out of the impasse.
S&P said it had declared Venezuela in "selective default" because it failed to make $200m in payments on two global bond issues by the end of a 30-day grace period, which fell on November 12.
"We have lowered two issue ratings to ‘D’ (default), and we lowered the long-term foreign currency sovereign credit rating to ‘SD’ (selective default)," the agency said in a statement late Monday.
It said payments on four other bonds also were overdue but still within the grace period. The overdue bond obligations total $420m, it said.
The debt crunch comes as no surprise in a once prosperous oil producing country whose inhabitants are now struggling with dire shortages of food and medicine, as the government cuts back imports to service the staggering foreign debt.
It has less than $10bn left in hard currency reserves, yet must make $1.4bn in debt payments before the end of the year, and another $8bn next year.
President Nicolas Maduro has formed a commission to restructure Venezuela’s sovereign debt and that of state oil company PDVSA.
But at its first meeting with creditors on Monday in Caracas — a 25-minute, closed-door session — participants said officials proposed no plan for restructuring the debt.
"They said they are going to form working groups to evaluate short-and mid-term debt renegotiation proposals," Geronimo Mansutti, from the Rendivalores brokerage, told AFP.
"But they didn’t give any concrete details on their plans, on what they hope to get."
About 70% of Venezuelan bondholders are North American, according to government figures.
S&P said there was "a one-in-two chance that Venezuela could default again within the next three months".
"We would very likely consider any Venezuelan restructuring to be a distressed debt exchange and equivalent to default given the highly constrained external liquidity," S&P said.
"In addition, in our opinion, US sanctions on Venezuela and government members will most likely result in a long and difficult negotiation with bondholders," it said.
At the meeting with creditors, El Aissami read a statement blaming US sanctions for delays to Venezuela’s debt repayments.
Restrictions include a prohibition on US entities buying any new Venezuela debt issues — usually a required step in any restructuring.
El Aissami’s presence was problematic for some, as the US has designated him a drug kingpin with whom US entities are barred from dealing.
A committee of the International Swaps and Derivatives Association (ISDA), meanwhile, is weighing whether holders of PDVSA debt with default insurance — credit default swaps — can collect payment.
The Maduro government had said it would make a $1.2bn payment on a PDVSA bond on November 2, but it was unclear whether the funds ever reached creditors.
The so-called Determinations Committee for the Americas, made up of 15 financial firms, met in New York following an initial gathering last Friday, "to discuss whether a Failure to Pay Credit Event had occurred" with respect to PDVSA, according to the ISDA.
It ended up deciding to again postpone a decision until Tuesday.
Tightening the squeeze on Maduro was the European Union’s announcement of sanctions, including an embargo on arms and equipment that could be used for political repression.
Late on Sunday, Maduro struck a defiant tone, insisting that his country would "never" default and pointing to ongoing negotiations with China and Russia.
But his options are very limited.
A default can be declared in several ways: by the major ratings agencies, big debt-holders or by the government itself.
As rough as the ride has been regarding debt, Maduro is also being buffeted by international accusations that he is acting as an autocrat — stomping on democracy by marginalising the opposition, which controls the parliament, and stifling independent media.
Adding to the political pressure against Maduro, the UN Security Council met on Venezuela at the behest of the US.
During the informal session, US ambassador Nikki Haley slammed Venezuela as an "increasingly violent narco-state" that poses a threat to world security. Permanent council members Russia and China boycotted the meeting, as did non-permanent members Bolivia and Egypt.
Venezuela’s envoy to the UN, Rafael Ramirez, called the meeting "illegal", saying: "This is a hostile act by the US and clearly an act of interference."