Latin American integration for sale (with a WSJ update)

Hugo Chávez was a man whose rhetoric could only be matched by his wallet. For example, he used to boast about how Petrocaribe, the financing scheme whereby Venezuela sold oil under favorable conditions to several Caribbean nations, was a tool of integration and “transforming union.” “Petrocaribe,” he would say, “is an instrument of liberation.”

I wonder how much “liberation” goes for on eBay.

Today, Miami’s El Nuevo Herald says that bankrupt Venezuela has decided to take the billion dollar debts that the Dominican Republic and Jamaica have with the country and sell them … to Goldman Sachs! The hefty discount is on the order of 60% of the debt’s value, an enormous hit for a country desperate for cash.

(In essence, for those of you less financially inclined, the Domincan Republic owes Venezuela $100, and Venezuela turns around and sells the debt to Goldman Sachs for $40. Now the DR owes Goldman Sachs $100 and, in theory, GS is making a profit of $60 while Venezuela loses $60 relative to book value. Please correct me if I’m wrong about this.)

The paper also reports that Venezuela is planning on doing the same with Jamaica’s debt. According to Miguel Octavio, who knows about this stuff more than I do, the deal is being underwritten by the Dominican Republic itself, wishing to buy its own debt at a fraction of their value.

I’ll leave it to those of you more knowledgeable of the situation to discuss the details in the comments section. But I will say this: if this is true – and apparently it is, given how Goldman Sachs, in typical chavista fashion, has “declined” to comment – then we are looking at the end of Petrocaribe as we know it.

Because, deep down, we all knew Caribbean nations thought they could get away with never paying their Venezuela debt. But if Venezuela continues to sell them off, they will have Mr. Goldman and Mr. Sachs to deal with. And those guys are a tougher bargain than Maduro will ever be.

It could be that Venezuela is monetizing its debt from all other nations in order to be able to continue supporting Cuba, the only country they really care about. Regardless, that is a vastly different Petrocaribe than the one we have come to know.

Party is over, Caribbean neighbors. That giant sucking sound you hear is the last gasp of one of Hugo Chávez’s signature ventures.

Update: The WSJ’s Kejal Vyas and Justin Baer say negotiations with Goldman Sachs over the DR and Jamaica debt are ongoing, and that an agreement has not been yet finalized.

21 thoughts on “Latin American integration for sale (with a WSJ update)

  1. Goldman won’t book the loan at 100 so they won’t have a profit of $60. The loan isn’t worth $100 because a) both countries are high risk borrowers and b) the interest rate that was being charged on the loans was ridiculously low. Combine high risk with low interest rate and you get a loan that isn’t worth par.

    I’m sure Goldman thinks its worth more than $40 but its not $100.


  2. Another question is whether this is the best deal the Venezuelan state could get from this. Venezuela’s government also knew well in advance that Caribbean nations were completely unable/unwilling to pay back, so I guess they weighed their chances and were wiling to take 40% of that debt, as *the best* they could receive back from their generosity….


  3. One point FRod always made and everybone ignored is that for years Venezuela has cooked up its National Accounts by booking the value of accounts receivable from Petrocaribe at face value, which masked the subsudy component of the transfers. One impact of this is the stripping away of one (of the 89) layers of fictions from National Accounts.


    • Tax authorities often count accounts recievables at their face value for income tax purposes even if they have not been paid for a long period , only when they are declared unpayable are they then written off as a loss but that can take years .

      There are dozens of accounting practices and tricks which allow an unscrupulous company to misrepresent its income . Never entertained any doubts that the income which Pdvsa was declaring on ts oil exports was much higher than it really was .


      • Never entertained any doubts that the income which Pdvsa was declaring on ts oil exports was much higher than it really was .
        Indeed. Off the top of my head, PDVSA claimed oil export income of $120 billion for 2012 and $108 billion for 2013. The immediate reaction to that is “With such an export income,why does Venezuela have such import problems?” With the obvious reply: no such export income.


    • Sorry Quico, you don’t get to cherry pick “points” in a futile effort to reconstruct FRod’s analysis which has been totally biased in support of Vzla’s ability to repay its debts


  4. These debts are probably worth even less because the terms say they can be paid in money or in goods and services. I doubt Goldman Sachs wants to receive beans from DR, so they probably have taken a cut to re-negotiate those terms.


  5. Another Wall Street firm of dubious reputation from benefiting greatly from Chavismo. For all you wall street honchos specializing in high risk sovereign debt deals, when you’re getting your million dollar christmas bonus just remember that it was HECHO EN SOCIALISMO!


  6. The revolution bought those votes in the OAS at a high price and used them every time there was the slightest chance of our neighbors giving them at least a slap in the wrist to Chavez. I wonder who will vote in favor once all those debts pass hands to less lenient debtholders.


    • Most of them are as contemptible and corrupt as Chavistas anyway. At least in the foreseeable, they will continue to vote with Venezuela in the hopes to be rewarded when oil goes back up.

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  7. For the current Regime these deals aren’t bad, since their ability/intention to collect this type of debt is virtually nil, unless they were to make deals with debtor countries to accept wildy over-priced medical doctors/sports trainers/other services in payment, as they do with Cuba. And, as someone said above, sadly enough there is no mention that Petro-Caribe oil shipments will not be continued in the future, although expediency for any rational government would logically dictate at least a cutback, except perhaps for puppetmaster Cuba.


  8. Dominican Republic Plan B:
    Send DR’s best secret agent to Cucuta with a 160 million dollar check. Next, exchange 160 million Dollars for 24.6 billion Bolivars at an exchange rate of 155 B’s to the D’s. Place stack upon stack of 100 Bolivar notes into 236 Ryder Rental 18-wheeler trucks, then drive over the V-C border at 4:30 in the morning. Next, point the convoy in the direction of downtown Caracas and the Central Bank of Venezuela. Quietly, and with little fanfare, explain to the early morning security guard at the BCV that the contents of said trucks, which extends over the horizon, should be used as ‘final’ payment of all Domincan Republic debt at the ‘official’ government exchange rate of 6.3 B’s to the D’s. That should do it….


  9. Deep discount is not due to the creditworthiness of RD, their bonds trade at very low discount. The reason is that the original terms of the debt under PetroCaribe had to be amended to turn it into a marketable financial asset. Namely, Venezuelan law and jurisdiction had to be switched in favor of NY Law, plus pari passu and cross default provisions. RD would only agree to the new terms (not at all more burdensome financially) if it was granted a discount similar to PDVSA, after all, they always had the option to purchase PDVSA bonds at market prices and pay their debt under PetroCaribe at face value.


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