Fifty Shades of Default

/ October 22, 2014
maduro china kids

Que bonito…que bello…

Until a few weeks ago, I thought default was like pregnancy: you either are or you aren’t. Instead, 2014 is turning into an education on the grey area between default and defaaaaault.

Take China. Under previous, hard-haggled-over financing agreements, Venezuela was supposed to send 330,000 b/d per day for the next three years to China as repayment for loans already received. Now we find out that China has “accepted” to lift both requirements.

In effect, it looks like Venezuela has negotiated a debt restructuring agreement with one of its biggest foreign creditors. Voluntarily? What does that even mean when you’re dealing with a penniless debtor?

Restructuring a debt agreement with the Chinese isn’t default in the classic sense, but it’s definitely on the Default Spectrum. Where precisely on that spectrum is up for grabs.

Or perhaps Venezuela is neither in default nor in non-default, but rather in a kind of quantum indeterminacy that both is and isn’t default.

This stuff makes my head spin.

Think of it like this: some time ago, the gringos pioneered “truthiness“. Now, Venezuela is exploring the infinite possibilities of defaultiness.

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36 thoughts on “Fifty Shades of Default”

  1. Those 330,000 b/d would ease as much as 8 billion of the 12 billion gap for next year. The chinese are thinking of the “long term” and next year’s parliamentary election.

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    • The regime that so loudly decried imperial meddling and shouted about resource sovereignty is so happy to continue to give away the country’s current and future wealth to stay in power.

      Typical.

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    • Still unsure to what extent the Chinese restructuring helps as don’ T they take a lot of heavy crude?..facts are:
      1) USA is most likely customer to pay cash immediately
      2) USA has no further use for another barrel of heavy crude….so who’s got the demand and the cash to really help in a short timeframe?

      Maybe the way for maduro to play this is just shut in production and stop buying offshore diluent which as a combination might actually save some cash

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    • You can access the article by creating a free account with the FT. Meanwhile, here are the operative paragraphs:

      Last week, Venezuela’s national gazette made it official that Caracas no longer needed to export 330,000 barrels bpd to China to pay for its loans. Instead, according to BancTrust, a boutique investment bank, PdVSA can now send as much or as little oil to Beijing as it wants. Furthermore, the terms of the loans have been extended beyond their current three years, perhaps indefinitely. China’s Ministry of Commerce has since confirmed the changes, pointing out they were made at Venezuela’s request.

      This de facto debt rescheduling tells us several important things. First, it is another confirmation of Venezuela’s economic and financial distress. To service its Chinese debts at lower oil prices, Venezuela would have had to export comparably more oil. But the country cannot increase oil output quickly. Nor does it have the financial wherewithal to service its Chinese debts in cash instead; foreign reserves are already under pressure. So something else had to be done.

      Second, China apparently agreed to the debt rescheduling perhaps because its banks believed in taking the long view. After all, Venezuela has the world’s largest oil reserves – so one day it will pay. But was the rescheduling China’s preferred choice? As the old saying goes: if you owe the bank $5, you have a problem, but if you owe the bank $5m, the bank has a problem. Either way, China is unlikely to be a source of fresh finance for Venezuela from now on.

      Lastly, Venezuela now has 330,000 bpd of oil – equivalent to almost $25m a day or $9bn a year — that it can use for other ends. One use might be to ease the import crunch that has resulted in shortages of so many basic goods, such as toilet paper. Another might be to divert resources to meet international bond payments. Either way, Venezuela is struggling and so far Wall Street is still being paid. But for how much longer?

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      • I read the FT piece and then followed back to the Chinese Ministry of Commerce dispatch. As I read it all the Chinese have done is cancel the minimum export requirement, not canceled the exports. So Venezuela must still send oil. This action has been taken because the falling price of oil requires Venezuela to cough up more oil and they cannot pump anymore, in fact production continues to decline. So I think the FT has it wrong. Venezuela is expected to send what they can, they simply will not be held to the exact terms (230,000 barrels a day for Parts A & B of the loan and 100,000 for Part C). The three year term has been extended and Venezuela will deliver what it can but not be forced to send what it physically cannot. China has cut them a huge break but not THAT huge.

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        • If Venezuela had any way to increase its production capacity, would it not make sense to attempt to renegotiate to export MORE oil now – the equivalent cost of 330k barrels to Venezuelans (ignoring interest) is less at $80 then it was at $110 (or at whichever price the contract was first signed). What Venezuela is doing by reducing it’s payments (in fixed number of barrels!) is allowing China to hedge against higher future oil prices.

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          • Would it not make more sense to repay the loan that has decreased 30% in cost than other loans at fixed cost? Smells to me like another fumble by Maduro and co.

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          • Regarding Venezuela’s ability to quickly increase its production capacity- Venezuela would not be currently importing oil from Algeria to mix with Orinoco heavy oil if it had the domestic capacity to do so. Venezuela definitely has the potential to increase its production capacity, but PDVSA has been predicting such an increase for at least ten years, without any results. Conclusion: no change in production capacity without a change in management.

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            • In the past Venezuela produced mostly light medium conventional heavy crudes and just 600.000 bls day of extra heavy crude which it had the capacity to upgrade and sell into the market . Increasingly Venezuelan production of light medium conventional crudes has fallen to ever smaller volumes forcing it to rely on extra heavy crude oil to replace the former ,Extra heavy crude oil however is much more costly and difficult to produce and needs to be either upgraded in very expensive upgrading refineries or mingled with pricely light medium crudes or refined diluents which makes the economy of producing and selling oil bls much less economically favourable for Venezuela . The situation is now such that Venezuela has to import light crudes and refined diluents from abroad to be able to place its extra heavy crude production in the international markets hurting the economies of its oil exports big time and getting worse,

              So its no longer a question of producing more oil to fix things but of either producing more light medium crudes ( which not very easy once the deposits become depleted or unexploitable through operational mismanagement) or of finding a way to improve the economics of producing and mingling and or upgrading the extra heavy crude oil to make it saleable .

              Pdvsa is getting less for each bl produced and sold than it used to , not only because of the above but because of the operational neglect and mismanagement of its oil and industrial resources .

              Its even worse when one takes account of the un commercial way in which Pdvsa must carry out its operations ( in the current system) and its exports to politically favoured foreign destinations.

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            • Bill Bass
              Pdvsa is getting less for each bl produced and sold than it used to , not only because of the above but because of the operational neglect and mismanagement of its oil and industrial resources.

              Back in 2007, CC had a posting on a rig in the Anaco area that had a blowout/burned up [Unfortunately, the comments have disappeared during the multiple software changes since then.]. In the process of investigation, I had some short communications with a PE who has made periodic inspection trips to Venezuela. When I showed him some rig photos prior to the blowout which indicated to me poor maintenance, he replied that in recent inspection tours of Venezuela, he had noted a progressive deterioration of maintenance of PDVSA equipment. And that was in 2007: it can only have gotten worse since then.

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        • More logically Venezuela must keep selling crude to China at current or higher levels but the amount of the price which must be given to China to pay for its loans to Venezuela can be less than previously agreed , depending on the countrys payment capability . It amounts to an extention of the payment terms , something which the regime will attempt to negotiate in due time with its other financial creditors (i.e via the exchange of bonds maturing soon for bonds maturing later) . This gives the regime some financial breathing room to keep going now that the crisis is bound to become worse as oil prices drop .

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  4. Another questions worth asking is whether will Venezuela adjust the terms of the Petrocaribe agreement. It would be a rather unique case where a sovereign debtor restructures its commodity-backed debt while it continues to subsidize the same commodity to reportedly weaker partners.

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  5. In the end, it won’t matter. The “rat holes” that Venezuela pours money into simply expand to accommodate the amount of money available in the system. As for the decision on whom to default on, China or Wall Street? That is a no-brainer. Wall Street has the capability to attach assets. China, not so much. China is making a good show of it, but I am sure they are inwardly seething.

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  8. The ongoing argument about default continues… this story exemplifies what really matters: when your creditors come barking at your door accompanied by their lawyers and orders from the courts to seize your assets, you have default with a capital D. Debt only matters if creditors have the willpower and means to make a claim in court and cause the debtor pain.

    As someone pointed out, if you lend to the mob and they won’t repay you, it just registers as “debt arrears”, might as well just write it off.

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  9. “Or perhaps Venezuela is neither in default nor in non-default, but rather in a kind of quantum indeterminacy that both is and isn’t default.”

    According to the Copenhague interpretation of quantum mechanics, when you have a system that is in a superposition of states, and you make a measurement, the system collapses into one of the states. Into which state it collapses is a matter of probabilities, defined by the original superposed state. So let’s not try to “measure” the “defaultiness” of Venezuela. We would very likely collapse into default. And that would be a real goddamn collapse.

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  11. Regardless of the rigorousness in the use of the term “default”, I think we can all agree that by now the situation in the country is critical. Maduro’s popularity is around 30% but they haven’t actually made any macro adjustments yet (no mayor depreciation, no rise in controled prices, no rise in the price of gas).

    Next year the government will have to pay several $ billions in bond maturity. Add the 12b on top of that and a possible resolution in the arbitration case against Conoco-Phillips.

    The quesiton now is whether a government like Maduro’s can hold on to power a year from now, with 10% support or less..

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    • People could be starving by the thousands in the streets, and 20% of the population would still support the government. Consciously understanding that their basic viewpoint, their cognitive world, has all been wrong is just too much for many people to handle.

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  13. Don’t know if this will work. Our favorite Chavista professor in Philadelphia, Dr. George Ciccariello-Maher, was asked “what could you recommend a source that can accurately report on Venezuela’s current economic and social situation?”
    The answer: VenezuelaAnalysis, TeleSur English, and Ultimas Noticias.

    Now we can learn the truth about Venezuela!

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    • Gotta love these pundits who are busy out-arguing established Harvard economists, or haven’t got a clue. Lo de Chicharronello da pena ajena. Uuuuuf

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  14. “Or perhaps Venezuela is neither in default nor in non-default, but rather in a kind of quantum indeterminacy that both is and isn’t default.”

    ROFL

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  15. Perhaps it is necessary for someone in this place to look at the motivations of the Chinese for agreeing to such terms? Business course 101: know your customer.

    The Chinese have a strategic plan to secure the supply of commodities to their nation for the next 50 years at least, at whichever price they can get it. This is not only happening in Venezuela but in other African countries, Southeast Asian countries, etc. As a consequence, they are more flexible in their lending approach than most anal-ists and academia teachers would have expected – these matters do not get a chapter in Harvard “real-life” business case studies, which doesn’t excuse them but well, with internet and google you would have expected people to be a bit more diligent.

    Naturally, now we will see the classic scenario playing out: anal-lists, academia teachers and opinadores de oficio, shifting their “imminent” default forecast from 2014 to 2015. Simple process, apply and repeat. How many times have we seen this movie in the past?

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  17. Los lobos o ovejas de sebin, o imint, menta y tody o mas, la antigua PTJ, DISIP, y se olvida que pensabamos que existia y queria! 50 grados de gris, entre un punto y un punto esta la infinitud, o el haber tenido un perro o capaz gato, cabos razos! no somos algunos, pero creemos! asi vuela la abeja!

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