Last Thursday, in a somber speech to the nation, President Nicolás Maduro announced what financial markets had been anticipating for years: Venezuela can no longer pay its debts. The president decreed that the nation’s debts would be “refinanced and restructured” in the months ahead.
The speech was not well received. Wall Street investors stampeded for the exits. Before Thursday evening, a Venezuelan debt default had seemed likely. By Friday morning, it seemed inevitable.
Venezuela now finds itself under a mountain of debt: nearly $70 billion, most of it borrowed and then either wasted on boondoggle projects that were never completed, squandered on populist giveaways or just plain stolen. Payments on these loans have stretched the public purse for years, leaving people on the streets literally hungry as dollars that might have been used to buy food went to Wall Street instead. On Thursday, Maduro finally fessed up: Venezuela just can’t keep paying.
One reason his speech alarmed markets is that he didn’t seem to really understand what he was saying. Maduro kept using the words “restructuring” and “refinancing” interchangeably, but those are two vastly different things: The former implies losses to bondholders, the latter merely a voluntary swap that leaves them whole. When facing a debt crisis on this scale, you’d expect a leader to pick his words with extreme care. Maduro’s sloppiness told you all you need to know about how professionally this process will be handled.
But the problem went deeper: Neither restructuring nor refinancing seemed remotely realistic. Either one would amount to a delicate high-stakes negotiation with foreign bondholders: talks where the Venezuelan side has to persuade them they’ll still get paid, only perhaps not so soon, or not so much. But Maduro decreed a restructuring and/or refinancing.
It just doesn’t work that way.
Maduro needs to persuade investors to believe in Venezuela. But the economy is in the middle of a horrific collapse. October’s monthly inflation is pegged at 45.5 percent. A profound three-year economic depression has brought per-capita incomes all the way back to 1950s levels. Food shortages have become endemic, with large majorities of Venezuelans involuntarily losing body weight because they can’t afford enough to eat. Basic development indicators such as maternal mortality are in free fall, while long-eradicated diseases such as diphtheria and malaria are making a terrifying comeback.
Does this sound like a country you’d want to invest in?
Venezuela needs profound economic reforms just to put an end to the economic chaos. Rebuilding the kind of economy a sane international investor might want to lend money to on reasonable terms will take years. It will take a root-and-branch rethink of every aspect of economic policy. It will take major reforms to reestablish property rights and investment guarantees, to rein in the uncontrolled money-printing that has already set off a bout of corrosive hyperinflation and to put in place credible policymaking systems that give investors confidence we won’t go down this failed path again.
Needless to say, Maduro offered no economic reforms of any kind. It felt as though he’s so used to autocratic decision-making at home that he has lost any notion that he can’t just order investors around.
Which is why when Maduro said “refinancing,” Wall Street heard “default.” Credit-default swaps on Venezuelan debt plunged after his announcement, to levels that imply a 99.98 percent probability of default in the next five years.
It has taken a staggering accumulation of blunders and crimes to bring a country as rich as Venezuela to this point. World-class corruption, on its own, wouldn’t have been enough to bankrupt the Venezuelan petro-state. Aggressive mismanagement alone wouldn’t have done the trick. Mindless adherence to a failed ideology, by itself, wouldn’t have put us over the top.
It took a uniquely perverse combination of all three — uncontrolled corruption and rampant mismanagement, hand in hand with a failed ideology — to do the seemingly impossible: bankrupt a country floating atop $15 trillion worth of oil.