Gulati says that this should help to protect them from seizure by holdouts. PDVSA’s receivables from oil production, and other oil-related assets, would effectively become sovereign assets. This would in effect make all of Venezuela’s sovereign debt oil-linked. Lee Buchheit and Mita Gulati, for example, suggest that Venezuela should withdraw PDVSA’s oil concession in return for accepting responsibility for its debt. There are a host of suggestions about what a restructuring for the combined debts of PDVSA and its sovereign might look like. And since Venezuela has now defaulted on sovereign bonds, rescuing PDVSA by swapping its debt for new dollar-denominated sovereign bonds is no longer a realistic possibility. Venezuela is therefore in deeper trouble than S&P’s pronouncement indicates. If ISDA does declare PDVSA in default, this would trigger a “credit event” under which credit default swaps (a form of insurance on corporate and sovereign debt) would pay out to investors.īecause PDVSA is entirely state-owned, its debt is in effect Venezuela’s sovereign debt. There seems no reason why PDVSA should be treated more leniently. When a cash-strapped household does this to a credit card company, the credit card company regards them as in default even if they eventually pay up. PDVSA has actually paid up, but well outside the “grace period” for payments. And separately, the swaps and derivatives association ISDA is debating whether to declare PDVSA, Venezuela’s state-owned oil company, in default. The other ratings agencies are still considering their response. S&P is the first to pronounce Venezuela in default on its international obligations. The biggest winners from distressed debt restructurings are always lawyers. Investors could take substantial losses, and there would no doubt be lawsuits lasting for years. But we can imagine what such a debt restructuring might look like: in 2012, Greece imposed a coercive debt restructuring on private sector investors, and Argentina has restructured its dollar-denominated debt twice this century, the second time to sort out the dog’s breakfast Argentina made of the first restructuring. Indeed, it has already announced its intention to do so, though as yet it has produced no plan. S&P also warns that Venezuela could embark on a coercive debt restructuring that would in effect be default.
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