Wright, mark

Venezuela’s Debt Restructuring Camilo Alvarez1 Daniel Dias2 Christine Richmond3 Mark L. J. Wright4 1 University of Minnesota, and Federal Reserve Bank of Minneapolis 2 Federal

Reserve Board of Governors

3 International 4 Federal

Monetary Fund

Reserve Bank of Minneapolis, and National Bureau of Economic Research

Disclaimer The views expressed are the authors and do not necessarily represent those of the Federal Reserve Bank of Minneapolis, the Federal Reserve Board of Governors, the Federal Reserve System, or the International Monetary Fund, its Executive Board, or IMF management.

Venezuela is Complicated Complicated portfolio of debts: Sovereign, quasi-sovereign, and private debts Portfolio not fully known, esp trade credit O¢ cial debtors include Russia and China (geopolitics)

Complicated and “interesting” legal issues: creditor coordination: CACs, exit consents, pari passu, domestic vs foreign law debtor: alter ego/piercing the veil odious debt U.S. sanctions

Complicated by mineral wealth asset seizure, sales and future clawbacks

Today: Three Questions

Focus on economics of debt restructuring ...

1

How much does Venzeula owe?

2

What are the prospects for debt relief? mutually bene…cial private debt relief o¢ cial vs private

3

What is Venzuela’s capacity to pay?

Q1: How Much Does Venezuela Owe? Measured at face value: Government bonds PDVSA bonds PDVSA notes O¢ cial loans Suppliers credits Arbitral awards Total

$37b $30b ~$5b >$50b ?

4b $100-150b

Between 47% and 70% of GDP (o¢ cial exchange rates)

Venezuelan Bond Debt But face values can be quite misleading when interest rates and maturity vary: PDVSA promissary notes issued at steep discounts

Need to look at payments details of debt instruments Problem: only have su¢ cient data on traded bonds

USD billions Government bonds PDVSA bonds

Face 37 30

ZCE 68 46

5CE 47 34

10CE 34 26

Risk Free 54 39

Market 5 4

Q2a: Debt Relief from Bondholders Usually, cost to debtor of repayment less than value to creditors (this is why they are debtors!)

This can change during crisis Theory: compute cost of repayment from CCAPM

USD billions Government bonds PDVSA bonds

Face

Market

37 30

5 4

Mutually bene‌cial debt relief!

CCAPM o¢ cial 27 21

CCAPM black market 19 16

Arrears to Debt Ratios in % Unweighted averages across 127 countries pooled, 1980�2006

3

risk�free rate for Paris Club market rates for bank/bond

Official

Banks

Bonds

Pooled across 414 Paris Club, 165 bank and 22 bond restruct.

9

Using market rates for discounting

Official

Banks

Bonds

Pooled across 414 Paris Club, 165 bank and 22 bond restruct.

8

Q3: Capacity to Pay – Oil Reserves

Venezuela Venezuela (301bb)

92 Others

Saudi Arabia

49 Others Venezuela (18bb)

Saudi Arabia

China Libya

Kuwait

UAE Kuwait

Canada

USA

Iraq

Mexico Iraq

USSR Iran

Iran

Conclusions

A Venezuelan debt restructuring will be complicated If can surmount legal and technical complications, prospects are promising: Mutually bene‌cial debt relief with private bondholders Mineral wealth can be used to incentivize agreement

There are some big "ifs" and "buts" remaining