Last Friday Venezuelan bondholders received a perfectly resistible invitation. They were asked to present themselves on November 13 2017 in Caracas to meet an individual identified by US authorities as a narco-trafficker (vice-president Tareck El Aissami) to discuss a debt restructuring that may well expose any participating US holders to criminal penalties. The market’s predictable reaction to the invitation was “qué pasa?” Explanations vary. One school of thought holds that this announcement was intended for domestic consumption; a get-tough-on-bondholders demonstration by the regime of Nicolás Maduro in preparation for next year’s presidential elections.
Mr Maduro has, after all, been paying bonds in full by savagely restricting imports of food and medicine; not a policy likely to appeal to a hungry electorate. Others argue that threatening a bond default unless a consensual debt restructuring can be agreed will force holders to lobby the US government to relax the sanctions it imposed on Venezuela last August. We suspect, however, a less visible objective. By announcing a debt restructuring and threatening a payment default, Mr Maduro drove the secondary market prices of the bonds off a cliff.
Prices may fall further next week if Venezuelan officials say something alarming during the meeting in Caracas (how could they not?). Once the secondary market price of a sovereign bond drops below about 35 cents on the dollar, the issuer may be tempted to buy the bond back rather than slog through a debt restructuring exercise in which impertinent investors can raise questions about economic policy and corruption. Naturally, even a heavily discounted debt buyback requires some money. China and Russia are possible candidates for fundraising; they have both ponied up in the past.
Venezuelan insiders are already alleged to hold significant positions in some of the bonds. Perhaps they could be tempted to increase their exposure if the price is right. For sufficient remuneration, even some private sector (non-US) lenders may be prepared to provide funding for a debt buyback secured by a pledge of the repurchased bonds. The technique is not novel. In 2008, Ecuador’s President Rafael Correa strategically defaulted on two series of the country’s international bonds at a time when the debt-to-GDP level was a comfortable 25 per cent. When the secondary market price of the bonds dropped to the low twenties, the Ecuadorean government was rumoured to have commissioned two companies to buy the bonds in the market at the discounted price. Six months after the default, the government launched a formal tender for the remaining bonds at 35 cents on the dollar.