Venezuela, a nation spiraling into a humanitarian crisis, has missed a debt payment. It could soon face grim consequences.
The
South American country defaulted on its debt, according to a
statement issued Monday night by S&P Global Ratings. The agency
said the 30-day grace period had expired for a payment that was due
in October.
A
debt default risks setting off a dangerous series of events that
could exacerbate Venezuela's food and medical shortages.
If
enough holders of a particular bond demand full and immediate
repayment, it can prompt investors across all Venezuelan bonds to
demand the same thing. Since Venezuela doesn't have the money to pay
all its bondholders right now, investors would then be entitled to
seize the country's assets -- primarily barrels of oil -- outside its
borders.
Venezuela
has no other meaningful income other than the oil it sells abroad.
The government, meanwhile, has failed for years to ship in enough
food and medicine for its citizens. As a result, Venezuelans
are waiting
hours in line to buy food and dying
in hospitals that lack basic resources.
If
investors seize the country's oil shipments, the food and medical
shortages would worsen quickly.
"Then
it's pandemonium," says Fernando Freijedo, an analyst at the
Economist Intelligence Unit, a research firm. "The humanitarian
crisis is already pretty dire ... it boggles the mind what could
happen next."
It's
not immediately clear what steps bondholders will take. Argentina
went through a vaguely similar default, and its bondholders battled
with the government for
about 15 years until settling in 2016.
Every case is different, though.
Venezuela
and its state-run oil company, PDVSA, owe more than $60 billion just
to bondholders. In total, the country owes far more: $196
billion, according to
a paper published by the Harvard Law Roundtable and authored by
lawyers Mark Walker and Richard Cooper.
Beyond
bond payments, Venezuela owes money to China, Russia, oil service
providers, U.S. airlines and many other entities. The nation's
central bank only has $9.6 billion in reserves because it has slowly
drained its bank account over the years to make payments.
The
S&P default announcement Monday came after Venezuelan government
officials met with bondholders in Caracas. The meeting was reportedly
brief and offered no clarity on how the government plans to
restructure its debt.
The
Venezuelan government blames
its debt woes --
and inability to pay -- on a longstanding "economic war"
waged by the U.S. More recently, the Trump administration slapped
financial sanctions on Venezuela and
PDVSA, barring banks in the U.S. from trading or investing in any
newly issued Venezuelan debt.
But
experts say the socialist Venezuelan regime that has been in power
since 1999 bears the brunt of the blame. It fixed -- or froze --
prices on everything from a cup of coffee to a tank of gas in an
effort to make goods more affordable for the masses. For years,
Venezuelan leaders also fixed the exchange rate for their currency,
the bolivar.
Those
moves were among the driving forces behind the food shortages.
Farmers couldn't sell at low prices without going out of business
because their cost of production was much higher. Importers also
couldn't afford to ship in food, knowing they would have to sell at
much lower prices than what they paid for at the port.
When
food shortages grew worse, an illegal black market emerged where
venders sold basic foods at vastly higher prices than the
government's artificially low prices. Inflation soared, making the
bolivar almost worthless.
One
U.S. dollar currently buys more than 55,200 bolivars. At the
beginning of the year, a dollar was worth about 3,200
bolivars, according to
dolartoday.com, a website that tracks the unofficial rate that
millions in Venezuela use to determine payments.
The
International Monetary Fund predicts that inflation in Venezuela will
hit 650% this year and 2,300% in 2018.
--This
story has been updated to characterize Venezuela's government as
socialist.
CNNMoney
(New York)First published November 14, 2017: 12:19 AM ET
No comments:
Post a Comment