This morning’s key headlines from GenerationalDynamics.com

With Trump’s sanctions in place, Venezuela expected to go bankrupt soon


A member of the national guard fires his shotgun during clashes in Caracas, Venezuela, in July (Getty)

An economic analyst is advising Venezuela’s government on ways to move Venezuela’s assets out of reach of American and other international courts if Venezuela defaults on its national bond payments, effectively declaring national bankruptcy.

Venezuela has met all its debt repayment obligations so far, but some analysts are predicting that Venezuela will default on bond payments before the end of 2017. Venezuela has an estimated $63 billion of bond obligations.

The probability of default has increased substantially since August 25, when U.S. President Donald Trump imposed sanctions that prevent further borrowing, either by the Venezuelan government itself or by the nationalized state oil and natural gas company, Petróleos de Venezuela, S.A. (PDVSA). With both the government and PDVSA severely restricted in borrowing more money to make payments on existing debts, it is believed that there will be a default. On August 31, the Fitch Ratings service downgraded Venezuela’s bonds from CCC down to CC to reflect the increased chance of default after the new sanctions were imposed. Reuters (26-Aug) and Latin America Herald Tribune (31-Aug)

Analyst advises Venezuela to keep its assets safe from creditors

A lengthy analysis by Mark Walker of Millstein & Co, co-authored by Richard Cooper at Cleary Gottlieb provides a roadmap for Venezuela to keep state assets out of the reach of creditors. In particular, it describes methods for keeping the assets of PDVSA, the nationalized state oil company, away from its own creditors and the government’s creditors.

According to the analysis:

As the humanitarian, economic, financial and political crisis intensifies in Venezuela, so too does the complexity of the tasks the country must accomplish to reverse the 18 years of mismanagement and policy distortion that marked the presidencies of Hugo Chavez and Nicolas Maduro. The difficulty of reforming the economy in the aftermath of these failed policies is compounded both by the need to carry out this reform in what is likely to be a wrenching change in the political landscape and by the fact that there are stakeholders in Venezuela with a strong interest in maintaining the status quo. That said, Venezuela has no other choice but reform and political change. The current government has openly opposed the reforms necessary to stabilize the Venezuelan economy and create the conditions for sustained growth. It has lost legitimacy and credibility internationally as well as domestically. The President and many of its senior representatives are isolated from discourse by sanctions imposed by the United States, and the acquisition and trading of new debt is now prohibited by the same U.S. sanctions, with other countries likely to follow. Accordingly, we start from the premise that the only Venezuelan government that will be able to carry out a restructuring of Venezuela’s liabilities is a government—which could be a caretaker or transitional government—that demonstrates a credible commitment to the necessary reforms and can undertake binding obligations in a restructuring whose validity under applicable laws is not subject to challenge.

It is good that Walker and Cooper get these assumptions out of the way because, in my opinion, the assumptions are unrealistic. In my opinion, Venezuelan socialist President Nicolás Maduro Moros will never “demonstrate a credible commitment to the necessary reforms.” This is the psychopathy we see today in governments around the world: Syria’s president using Sarin gas and barrel bombs on innocent women and children, the governments of Eritrea and Burundi using arrest, rape, murder, and torture at will on anyone who expresses opposition to the government, or Burma’s government using genocide and ethnic cleansing to eliminate a million Rohingyas.

In my opinion, Maduro’s government is headed in the same direction as the governments of Syria, Eritrea, Burundi, or Burma, and not in the direction of “a credible commitment to the necessary reforms.”

Walker and Cooper agree with that, but make an even more unlikely assumption — that Maduro will step down and give control to “a caretaker or transitional government — that demonstrates a credible commitment to the necessary reforms.”

So having said that, let’s look at the actual proposal:

Accordingly, we see as the first step and priority in any restructuring process the implementation of measures to protect the country’s assets, particularly those vulnerable to seizure, such as the proceeds from the sale of oil, while it simultaneously commences discussions with the IMF, bilateral lenders such as China and Russia and market participants — a process that will take several months at the least. Once the nation’s assets are secure, Venezuela will be able to enter into good faith negotiations with the official sector and its creditors, use its scarce foreign exchange in the best interests of the country and stop immediately the pursuit of dangerously uneconomic transactions whose sole purpose is to avoid a bond default.

…

Knowing that a default is both inevitable and necessary, Venezuela must have as its highest priority the objective of protecting PDVSA’s cash generating assets located outside Venezuela.

Maduro in “good faith negotiations”? I don’t think so.

Anyway, Walker and Cooper suggest several methods from Venezuela and PDVSA to effectively declare bankruptcy. They recommend that Venezuela modify its existing Venezuelan Public Sector Revitalization Law so that it will be recognized by the U.S. Bankruptcy Court as “a collective judicial or administrative proceeding in a foreign country,” where “collective” means “one that considers the rights and obligations of all creditors” in allocating PDVSA’s assets. This would mean, for example, that the law could not favor Maduro’s friends — Russia and China, who are owed $37.2 billion — over American and other Western creditors. This would require an independent entity outside of Maduro’s control allocating PDVSA’s assets among creditors and, once again, in my opinion, Maduro would rather eat mud than agree to anything like that.

As a last resort, Walker and Cooper advise that if all else fails, Venezuela should try to get the bankruptcy processed by a UK court, taking advantage of English law, which may be more lenient.

Finally, the Walker and Cooper paper returns to the assumption of a transitional government:

Our premise, however, is that the current regime cannot today restructure its debt and that the Venezuelan Public Sector Revitalization Law will be enacted by a government that is attempting to overcome a humanitarian and economic crisis of historic proportions created by prior administrations. Far from imposing sanctions, we assume that at such time U.S. policy will be to promote a restoration of Venezuela’s economy and the revival of its democratic.

So the idea is that Maduro will agree to hand power over to an independent transitional government, and the U.S. courts will be extra-lenient “to overcome a humanitarian and economic crisis of historic proportions created by prior administrations. Far from imposing sanctions.”

Well, stranger things have happened. And even if Maduro does not voluntarily step down, maybe Venezuela’s army will finally force him to step down — for the good of the country.

What the Walker and Cooper proposals really show is that Venezuela is at a fork in the road. If Maduro steps down and lets someone else govern, some of the proposals discussed here could be implemented.

It is tempting to say that never happens, but, in fact, communist and socialist governments did end peacefully in Cuba, East Germany, and Russia, and returned to at least a semi-capitalist free economy.

The other alternative is that Maduro refused to step down, and the streets are flowing with blood. Reuters and SSRN papers

Maduro tells Venezuelans to breed and eat rabbits


Yum! Dinner!

Venezuela’s socialist President Nicolás Maduro Moros has inflicted enormous pain and humiliation of the country’s people, with empty store shelves and shortages of everything from toilet paper to medicines to vegetables, jailing owners of closed factories, jailing bakers who make croissants or brownies instead of bread, accusing Twitter of attacking his government, one of the highest murder rates in the world, and an inflation rate of 33 percent per month, forcing many people to forage for food in garbage cans.

Now, Maduro is announcing a “rabbit plan” to help starving Venezuelans. He announced on state television, “For animal protein, which is such an important issue, a ‘rabbit plan’ has been approved because rabbits also breed like rabbits.”

However, the rabbit plan faced an early setback. Freddy Bernal, the head of Maduro’s food program, distributed baby rabbits to families in 15 communities, as a pilot project.

However, instead of eating the rabbits, people kept them as pets. According to Maduro, “When he came back, to his surprise he found people had put little bows on their rabbits and were keeping them as pets, it was an early setback to Plan Rabbit.”

Bernal is telling Venezuelans to get over their love of rabbits. People need to understand “that the rabbit is not a pet, but two and a half kilos of meat with high protein and no cholesterol put on the table of Venezuelans.” BBC and Daily Mail (London) and VOA

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KEYS: Generational Dynamics, Venezuela, Nicolás Maduro Moros, Hugo Chávez, Petróleos de Venezuela, S.A., PDVSA, Fitch Rating, Freddy Bernal, Mark Walker, Millstein & Co, Richard Cooper, Cleary Gottlieb
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