(Venezuela’s CDS curve this morning. It costs 12 % (1200 basis points) to insure against default in 5 years)
The big economic news last week in Venezuela was Chavez’ announcement that he needed another Bs. 45 billion (US$ 10.46 billion at the official rate of exchange of Bs. 4.3 per US$) in new debt this year. This amount is on top of the Bs. 40 billion (US$ 9.3 billion) in new debt contemplated originally in the 2011 budget. Thus, Chavez is asking fro an increase of “only” 112% in debt for the year.
Never mind that this is not even legal. Under the Venezuelan Budget Law, debt for the year has to be requested in December of the previous year and only in cases of emergency can it be increased. There is no emergency, other than Hugo wants to be reelected. The money is in fact earmarked for Mision Vivienda, Mision Trabajo and to pay interest in old debt. But Hugo cares little about legality, as he is above the law.
Initially, Government officials said that most of this new debt would be in local currency. However, this was later changed as the Government realized that if it was all issued locally, it would hurt local credit. So, unofficial sources say that it is likely to be half and half, with the Government issuing some US$ 5 billion in new debt abroad (plus whatever PDVSA issues in the rest of the year)
All of this happens as oil prices are still near the US$ 100 per barrel level as measured by Venezuelan oil basket last week. Go figure!
The problem is that Government officials continue to say that Venezuela can issue more debt as its debt to GDP ratio is small. This appears to reflect the assumption that Venezuela is a country with a credit rating of investment grade, which is not the case. In fact, Citibank suggests that the biggest danger now in the face of this news is that rating agencies downgrade Venezuela because of the increased debt.
Any debt issued abroad will be very expensive. In February, PDVSA had to issue bonds paying a coupon of 12.75% and credit conditions are very similar to what they were in February. Even worse, the total debt to be issued this year is close to 25% of the budget, an unheard of number in the country’s history.
The worst part is that some of this issuing will be made in order to maintain an artificially low exchange rate, which implies that it will be more expensive that it needs to be. Even worse, part of the money will be used to pay interest on all debt and most of it in discretionary Misiones, not on investment.
The rate of growth is unsustainable and Chavez is now accelerating it, either oil soars or Chavez stops this if gets reelected. PDVSA has issued US$ 9.1 billion in new debt since last August, while the Republic paid US$ 1.5 billion in the 2011 bond which matured in April. A PDVSA bond matures in July in the amount of US$ 2.4 billion. Analysts were expecting the Republic to issue at most US$ 3 billion in 2011 in foreign currency, it may now be as much as US$ 6.5 billion, but there has been no official announcement of the exact amount.
The problem is that Venezuelan bonds trade in a very specific market, which is quite limited. Since the country is below investment grade, only Emerging Market dedicated funds and hedge funds invest in the country’s and PDVSA’s debt. Since the bonds contained in the EMBI Index are about US$ 400 billion, Venezuela’s outstanding debt is a large fraction of that index, which would require that all funds overweight Venezuela. Thus, Venezuela’s debt yields a lot, not so much because of risk, but because of the excess supply in the markets. Every time a new bond comes to market, the supply increases which affects all bonds. This will only get worse in time as the country continues to issue. Thus, even at a constant rate, this would not be sustainable and certainly too expensive.
Below, Chavez’ request to the Assembly, not even one word about the justification for this new debt. It even says “the excess of oil revenues has to be distributed to the “people”, but this is not the excess, this is “extra”, it is not income, it is debt. (double click twice to read).
The Devil's Excrement 
June 12, 2011 at 2:18 pm
It would depend on the attitude of the Government. First, I assume Exxon Mobil, the “small” case will be first. That has been capped at US$ 7 billion and could be dealt with with a combination of refineries and oil supply. I expect this case to have a ruling next year. How the Government decides to deal with it is the key.
Conoco is much bigger and more difficult, it was almost twice as large as Exxon. But, if they pay exxon, why would they not look for an arrangement with Conoco? Thus, the first case is the key. If they try to find the solution, the debt could actually go much higher. If they don’t it could fall, but once again, if you want to borrow 10-15 billion, will you then not pay 7?
June 12, 2011 at 2:11 pm
Miguel,
Would a negative ruling on the on-going arbitrage cases change the scenario. The government seems to be laying out expectations for a 3B to 6B settlement. It seems that if this is the case they might be able to finance it away. But a higher ruling might choke the cash flow … What is the likely reaction if this comes to happen ? I agree that the last resort will be default. That begs the question – in the scenario that an Opp candidate somehow is able to win – it is not going to be easy to explain that Chavez Bill’s are due mid way through that government.
June 12, 2011 at 7:23 am
Astera,
“There’s also a school of thought that says hydrocarbons are constantly being formed under conditions of extreme pressure and temperature”
Ah, yes…the fart-to-oil argument. I rest my case. I hope we talk about this in 20 years. Whatever it is I believe there will be an energy shift in a decade to two decades. Still, in the meantime, oil prices will go up and up with the NORMAL local minima. I don’t know why on Earth people refer to 2008-2009 as ‘back to normal’. Oil price evolution, normalized and all, does NOT corrspond to any linear function.
June 10, 2011 at 11:22 pm
Kepler:
“Oil doesn’t multiply and cannot grow like that, it grew through a process of millions of years.”
Ah yes, the “dead dinosaur” argument. There’s also a school of thought that says hydrocarbons are constantly being formed under conditions of extreme pressure and temperature in the lower levels of the earth’s crust. Some pretty good science to back that up, even, along with plenty of carbon, hydrogen, temperature, and pressure.
June 10, 2011 at 12:34 pm
Peak oil predictions have been proven wrong as consumption has dropped slightly and proven reserves have increased. It does not mean peak oil will not happen. What it may mean is that it is years away from coming to pass. Consumption will increase with population and economic growth but it is not a safe assumption that alternative energy sources, including hydro and nuclear, will not contribute to substantially to defer peak oil. On the other hand, Chavez will be long gone before Venezuela oil is in optimum production state.
June 10, 2011 at 10:33 am
Faustus,
“The only shortages in the human world are the shortages of human ingenuity and human will.”
That was probably what the Mayas said around the year 900 and they were right…and wrong to some extent.
I have no doubt alternative technologies will evolve. I see them here all the time, I see how e-cars are starting to appear in this very city, our first little train driven by solar energy, etc.
Still: prices are bound to go up, with this or that local minimum. Some time they will collapse but that is years and years ahead.
Until alternative energies are ripe enough, you have to confront a fact: the earth is not flat and thus you can only drill so much. In fact, you will probably be able to drill up to 20 kilometres and find oil, one way or the other. And and what costs? Oil doesn’t multiply and cannot grow like that, it grew through a process of millions of years. So technology IN oil extraction and use has its limitations.
So, all in all, I expect we will have higher prices at least for a decade, with local minima as we had in 2008-2009.
June 10, 2011 at 9:44 am
I would like to add this recent comment concerning world oil reserves. It is just one man’s opinion, and there are sure other contradictory opinions as well, but it is well worth the read:
Global oil reserves rose by 6.6 billion bbls to 1,383 billion bbls in 2010. That represents an increase of 25% over the 2000 figure of 1,105 billion bbls, despite an estimated cumulative production of 318 billion bbls during the intervening ten years. Thus global reserves additions amounted to around 596 billion bbls between 2000 and 2010. _BP Statistical Review of World Energy
As oil prices continue to trend higher, more resources will be devoted to exploration, discovery, and production of new reserves. In addition, more work will continue to be put toward substitution of alternative synthetic liquid fuels in place of conventional petro-fuels.
Something that peak oil doomers need to ask themselves: “If oil production hasn’t crashed under the Obama energy starvation regime, under the lax maintenance and production regimes of Russian, Venezuelan, and Iranian national oil companies, and under the general incompetence and corruption of state oil companies around the world — what will it take to crash global oil production far enough to bring about the collapse?”
The world is floating in hydrocarbons of all kinds. The only shortages in the human world are the shortages of human ingenuity and human will.
http://oilprice.com/Energy/Crude-Oil/Global-Oil-Reserves-Increase-by-6.6-Billion-Barrels-in-2010.html
June 10, 2011 at 8:37 am
Default is the final desparate measure. I have not changed my mind, I never believed that it is around the corner, the economy is totally distorted, but defaulting will not help since it gives you little and removes the possibility of further financing. But clearly, the oil basket going from 67 dollars to almost 100 from last year to this year makes life much easier for the Government.
June 10, 2011 at 8:34 am
a good article
http://spectator.org/archives/2011/06/10/hugo-the-magnificent
June 10, 2011 at 7:42 am
Well it’s happened. The rubber stamp assembly, as is the norm, signed off on the additional debt. Budget decisions for the last year have been driven by election year vote buying and I’m certain this decision will only seal the deal. What a sad state of affairs from every angle.
June 10, 2011 at 4:22 am
I agree. Now, Miguel, I have the impression you were previously more inclined to think the government would collapse sooner because of all the mismanagement. Somehow it seems to me you thought it was going to do so because a time would come when it would stop pawning Venezuela’s future, it would need to make something reasonable.
I said back then Chavez and his people would sell Venezuela’s children if need be just to keep up in power.
My question is: what made you change your mind?
Also: do you know who among the alternative forces voted for the new debts?
June 9, 2011 at 3:19 pm
It is a huge assumption to think they are making any assumptions. These guys just move forward hoping for the best, looking to the next battle, not the next plan. They adjusted well in 2008, it is a high wire act, unfortunately I think they can keep it up for a while…
June 9, 2011 at 3:01 pm
Miguel Octavio Says:
“However, this does not affect my thoughts on default. After Pdvsa pays the $2.4 billion maturity of the 2011 bond in July, there are no maturities in 2012 and about US$5 billion between 2013, 2014, 2015 and 2016, that’s truly small in the scale of Venezuela’s GDPnd oil income and would make little sense to default and close doors to financing for that and should be easily managed as long as the drop in oil prices is not huge.”
Agreed. That’s a very strong point. However, when a country like Venezuela is 90% dependant on their external revenues from one source, oil, then it would be important to know what ‘assumptions’ are being made by Venezualen government officials on the future price of oil. Are they assuming a 100+ dpb for 2012? Even small down ticks can cause havoc with the budget process, not to mention unexpected shutdowns of any of the major refineries. Taking a cue as to how FONDEN is being administered, it would seem to me that the government in Caracas rarely makes provisions for things going wrong. I still think 2012 could turn into an economic disaster for Venezuela were oil price fluctuations to come into play. Perhaps not. Nonetheless, I think we can all agree that Chavez and the boys are running an economic high wire act, …without a net!
June 8, 2011 at 10:04 pm
The EMBI info was given to me by JPMorgan, the precise number is 411 billion and Venezuela 7.4% of it. The EMBI is an index that is supposed to reflect activity in the markets, when there is issuance by a country, it is included, but percentages remain the same. Venezuela is about 29 billion of the index or 7.4%, but that includes PDVSA, which is part of the Index (Venezuela’s bond debt is much larger, the Republic alone has US$ 27 billion outstanding, PDVSA 30.6 billion). There is no issuance in emerging markets like Venezuela’s in the last few years. In fact, since 2007 Venezuela has been the emerging market with the largest issuance by quite a bit. For example, the PDVSA 2007 issuance was the largest single issue by a corporate in EM in history. Brazil net debt has actually gone down in the period, for example. So, if Venezuela issues this year US$ 12 billion, that would be equivalent to half its share of the index, every fund would have to be “overweight” Venezuela in order for the market to absorb it. That is why PDVSA 2022 with identical characteristics to the Global 2022 (In fact, it matures before the Global) trades 6 points below and the Global 2022 is cheap compared to the country’s curve. Too much supply, not too much risk.
To give you an idea of scale, Brazil which is investment grade has net international debt of US$ 44 bilion, Mexico has US$ 36 billion. Venezuela has issued US$ 9 billion since last August and will likely issue another US$ 6 billion in the remainder of the year.
June 8, 2011 at 9:45 pm
I am not sure I follow your argument. You say the bonds contained in the EMBI Index are about US$ 400 billion but does the EMBI track a representative subset of the qualifying bonds or does it track all of them? In other words, does $400 billion represent the total face value of the qualifying bonds in emerging markets? If not, then I don’t see the relevance of “Venezuela’s outstanding debt is a large fraction of that index”. And in any case, if the majority of emerging markets issue more debt at the same time as Venezuela, doesn’t that mean that Venezuela’s fraction of the emerging market debt remain fairly constant? By the way, where can one find the information about the total face value of the EMBI being about $400 billion? That’s interesting.
June 8, 2011 at 3:36 pm
Peak oil is a long range effect. Current oil prices went up from $80 to $100 because of a single reason: Lybia. As the economy cools down, which it is right now for a lil bit mostly due to Japan and high oil prices, prices of oil should drop. However, this does not affect my thoughts on default. After Pdvsa pays the $2.4 billion maturity of the 2011 bond in July, there are no maturities in 2012 and about US$5 billion between 2013, 2014, 2015 and 2016, that’s truly small in the scale of Venezuela’s GDPnd oil income and would make little sense to default and close doors to financing for that and should be easily managed as long as the drop in oil prices is not huge.
June 8, 2011 at 3:25 pm
As this week’s OPEC meeting showed, there are two ways to get more money by selling oil: increase production or raise prices. Saudi Arabia can increase production at will, Venezuela cannot. Not sure about Iran’s motive for supporting raising prices vs production, perhaps just solidarity against the “tools of the evil empire”.
There is plenty of oil.
June 8, 2011 at 3:23 pm
Faustus,
You don’t believe there is Oil Peak?
Both believers and non-believers of the Peak Oil theory could still find common ground in the scenario I presented. In my opinion Peak Oil is still 10 or 20 years away, at best. The energy market is changing rapidly. Most people would be surprised to learn that oil consumption in the US has remained steady for the last 5 years, and might even have declined somewhat. European consumption rates have also been slowly dropping. It’s the Chinese who are forcing up all of the demand. Are they hording oil? Perhaps not. But pay close attention to the Chinese economic bubble. They’ve got tens of thousands of vacant homes/buildings all over China. It is the ‘only’ investment opportunity for ordinary Chinese citizens. The Chinese government is slowly raising their interest rates to prevent inflationary pressures. If the Yuan finally reaches a reasonable exchange rate, Chinese goods may become uncompetitive with goods from Indonesia, India and Vietnam. That’ll cool off their red hot economy in a heart beat.
Watch gas! There is a revolution going-on in the natural gas markets. This will take enormous pressure of increasing oil demands in the future. Gas is the future. It will have a dramatic affect on all energy uses. It’s a fascinating story.
June 8, 2011 at 2:38 pm
Faustus,
You don’t believe there is Oil Peak?
June 8, 2011 at 2:18 pm
Miguel Octavio Says:
“If oil does not go very low, I dont see any problems until at least 2017.
…”
What if oil were to drop to around 70 dollars a barrel, for 6 months or so, starting in January of 2012? Impossible? What would that do to the economic forecasts for the Bolivarian Republic?
It is not as far-fetched as most people think.
1…The current Brent crude price of 100+ dollars per barrel is like a red cape in front of a bull to many of the major oil corporations, independent drillers, and ascending oil powers around the globe. (Kazakhstan, Azerbaijan and Brasil among them) At these prices the Canadians, primarily Alberta, are making money hand-over-fist with their tar sands. The force of ‘the market’ is surely something to be reckoned with.
2… In 2 weeks the US Fed is probably going to halt QE2. That means that the US Federal Reserve is going to have to find buyers for over 1.4 trillion dollars of debt over the coming months. They are going back to the open market. Oh boy. The Chinese, noting how they got screwed in the past, are going to be reluctant to buy-up any more of this debt,….at current interest rates. The Feds will thus have to offer a higher interest rate to attract attention. If that occurs, and it is likely to occur, interest rates will be raised throughout the United States. That may have a dramatic impact on world oil prices because that low interest money will no longer be available, a slush fund of sorts, to be plowed into the oil markets. This speculative money has driven oil prices for the past 3 or 4 years. That dynamic factor may slowly melt away with ever increasing interest rates.
Point? Over time, market forces compel all prices to become rational. Not even Hugo Chavez, standing on a podium, beat red and with arms flailing, can stop it. If oil prices do stabalize, Venezuela could be looking at an economic catastrophe in 2012.
June 8, 2011 at 9:26 am
As Miguel mentioned, being out of power is not an option for Chávez.
One living example is Gadhaffi. He knows he is dead out of power, so his best option is to try to survive until the next day.
The same with this chavista government. Fiscal sustainabilty and development do not matter, since:
1) If he is still in power when the train derails, he is confident that somehow he will improvise an exit one day at a time.
2) If he is not in power when the train derails, it does not matter because he will be exiled, incarcerated or dead anyway.
Now, taking this logic to the next elections, he will do anything in his power to win. Every unethical and outright criminal act is possible because:
1) If he is still in power in 2013, he is confident that somehow he wil manage to suppress criticism and discontent one day at a time.
2) If he is not in power when in 2013, it does not matter because he will be exiled, incarcerated or dead anyway.
Having said this, my hope is that he will lose the 2012 elections and, in a trick of history, his cronies will sell him when he tries to manipulate the results.
And “colorín colorado”… in 2013 Chavez will be exiled, incarcerated or dead anyway….
June 8, 2011 at 7:21 am
Loro,
Oil prices in 2008 were not really that low on a middle-term perspective. And in 2009, when the local minimum hit the country, they were still three times the level they were in the 5 years before Chávez came to power. The country needs 10% oil price increase yearly or massive debts just to keep some semblance of GDP growth. Still, even if oil prices were to go down to 80 or so for a couple of years, Hugo can survive several years – all things being equal, even if he needs to sell off another piece of Venezuela.
This can be seen as a rule until the alternative parties, the Internet-enabled Caraquenos, Valencianos and Maracuchos realise they have to go beyond their wee feuds and contact the 70% of the population with a vision and a united team, not just a uniqu candidate.
June 8, 2011 at 4:34 am
These oil prices only help to COVER the problems, until you have to face it. Like trying to heal a dislocated leg with painkillers.
When the painkiller is gone, or it’s not enough, you are worse.
June 8, 2011 at 3:16 am
I really hope so, Miguel. And I really hope that the suits bite him and collaborators hard.I also hope that a serious nervous breakdown will take him out.
I hope…
The reality is that a majority of Venezuelans lack the ability to think three minutes into the future and moral principle (which could act as a nice stand in for foresight). This means that they take the goods happily, gamble and drink; but become violent when the bills arrive.
This is going to require a lot of explanation, a lot of transparency, from a new administration. All the while, chavista jamming and misinformation will be on.
Anyhow, another economic cycle in the world economy will turn downwards just as it is now turning upwards. Keynesians speak of counter cyclical policies. The counter-cycle part of increasing public spending and lowering interest rates is welcome when there is recession. The counter-cycle part of stopping the boom is mostly not done because… hey, we are all making a killing, everybody gets a job and my house is twice as valuable. Worse, the now pro-cyclical policies are kept. Result: October 2008.
This means that we can expect oil prices to drop quickly at some point, like they just did in 2008, when they were highest.
June 7, 2011 at 9:47 pm
If oil does not go very low, I dont see any problems until at least 2017. Capital payments are low each year until then. Interest payments run 5 billion or so per year. I think markets will stop Hugo from issuing if he keeps this rate of issuing. Once again, I think the problem is supply and no transparency, not risk. So, the opportunity in my opinion is not close.
Yet…
June 7, 2011 at 9:35 pm
Miguel,
Although the CDS look very expensive today what would be the sweet spot time wise to consider a one sided bet that he get’s downgraded and can’t afford the interest payments for the increased debt negative cash flow ?
Is it worth taking a look at the maturity curve and how the yield behaves when they try to issue so much debt ?
It is never wise to bet against a goverment but I do see him defaulting if it comes to that.
Is there an opportunity to be explored ?
June 7, 2011 at 5:59 pm
Chavez will never be indicted for any crimes. He is the world’s master in “dictatorship by democracy.”
June 7, 2011 at 12:36 pm
No, I am saying there will be too many human rights suits against him that today don’t move through the Courts because of him.
June 7, 2011 at 12:18 pm
MO I do not agree about “too many human rights abuses.” Certainly they exist along with corruption, nepotism, theft but as usual in latin american politics I expect he would be exiled to Cuba then pardoned after a couple of years and allowed to return. Hell, if I’m wrong he should still be in prison, correct?
June 7, 2011 at 11:51 am
Perhaps when the people of Venezuela reach the same level of human rights abuse and poverty that the people living in the Niger Delta have, then they will understand what Chevez has done to them and the country.
Have a Polar, sit back and enjoy the week all.
June 7, 2011 at 11:50 am
Miguel is right. From now on it is only “forward”.
June 7, 2011 at 11:25 am
Hugo could not survive being out of power, too many human rights suits.
June 7, 2011 at 11:23 am
He is breaking the piggy bank. Again.
If he gets reelected he gets his way. You can only hope that it blows up in his face circa 2016.
If he does not… a more responsible administration will have to face both immense outstanding debt, people accustomed to the “gimme” lifestyle, and outstanding promises. Hugo gets back in power.
Sheesh, Venezuelans will learn the hard way.
June 7, 2011 at 10:31 am
And people on the streets won’t feel this…until it’s too late.
OT but not so OT:
http://www.infodefensa.com/?noticia=venezuela-recibira-los-ocho-aviones-chinos-shaanxi-y-8-en-agosto-de-2012