reports that Venezuela and Argentina could default on their debts, the
countries’ dollar-denominated bonds are underpriced and unlikely to
default, says Mark Weisbrot, co-founder of the Center for Economic and
Policy Research.During the past few weeks, numerous reports in the business press have
suggested that Venezuela will default on its bonds. A Bloomberg News
reporter stated that “it is not a question of if, but when” the government will default. Another Bloomberg article
warned that Venezuela has $21 billion of debt due by the end of 2016
and only $21 billion in reserves – as if governments pay off their debt
out of reserves. And CNN reported that “the spectre of default looms
larger” for Venezuela, “which is deep in debt and has been burning
through its foreign currency reserves.”
Should foreign investors believe these stories? When in doubt, it is
usually a good idea to look at the numbers. There are two types of
dollar-denominated bonds that these reports refer to: Venezuela’s
sovereign or government bonds, and the bonds of the state company,
Petroleos de Venezuela SA (PDVSA).
The totals for interest and principal due each year over the next
three years are about $10 billion, of which roughly half is principal
and half is interest. (After 2017, principal payments drop off to low
levels.) Normally, Venezuela would be able to roll over the principal
and issue new bonds for the principal coming due. That would leave
approximately $5 billion in interest payments. Venezuela has about $50
billion in oil revenue at current prices of $55 per barrel; it is
difficult to imagine that prices would fall low enough, and stay there
long enough, for Venezuela not to be able to afford $5 billion in annual
Apparently some people do. As of December 16, Venezuela’s sovereign
bonds that mature in March were yielding a 76% annualized rate of
return. PDVSA’s bonds maturing in 2017 were selling at 45 cents on the
dollar. There are huge profits to be made for anyone who is willing to
bet that Venezuela doesn’t default over the next three years and wins.
In fact, the prices of Venezuela’s bonds are so depressed that the
government could buy up the whole stock of debt that comes due in the
next three years, nominally worth about $14.3 billion, for less than $9
billion — and probably even less, since the government already owns some
of that debt. And they have enough assets to sell – including $14
billion in gold – that they could do exactly this. If they are reluctant
to sell the gold, they can swap it for cash.
And then there is China, which has loaned Venezuela $46 billion over
the last 8 years, with $24 billion having been paid back. Would China,
which considers Venezuela to be a “strategic ally,” let the government default on its debt for lack of a few billion dollars or less?
Argentina’s bonds provide another opportunity for a high return,
thanks partly to media coverage reporting that the country has already
defaulted on its sovereign debt. This is somewhat misleading, since
Argentina deposited the full interest payment on its sovereign bonds for
distribution to creditors on June 30, only to have payments blocked by a New York Federal District judge.
There are a number of ways to work around his decision and
jurisdiction; since the government is determined to pay its creditors,
it will be done. The Argentine government’s foreign debt owed to private
creditors is about 7% of its GDP; it would not make sense for any
government to default on such a small amount of debt.
It is always a good idea to read the business press with a critical
eye. In the case of countries where media bias is unusually strong, it
can also be quite profitable for investors to do so.
Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. He is also President of Just Foreign Policy.