The Venezuelan External Public Debt Crisis: Everything Everywhere All at Once
The crisis in Venezuela involves several dynamic problems—some of which are entirely unrelated to democratic backsliding. From the increasing criminalization of the weak state to systematic human rights violations, there are many issues to consider in advancing a complex transition. Because of the diversity of issues to be solved, Venezuelan external public debt has been largely ignored.
For instance, in the memorandum of understanding signed in Mexico, NicolásMaduro and the Unitary Platform included the right over external assets without mentioning the external liabilities. From a simple accounting perspective, it is impossible to design a strategy regarding external assets that ignores the external debt. Particularly when the external debt—estimated at 140 billion dollars—exceeds, by far, the value of the external assets.
Everything about the Venezuelan external assets is related to the external debt. And the debt claims that pose risks over those assets are everywhere: in international arbitrations before the International Centre for Settlement of Investment Disputes (ICSID), in the U.S. District Court of Delaware, in commercial courts of The Hague on the Paris International Chamber of Commerce. Because of the deferral of a comprehensive solution, all the problems related to the Venezuelan debt could explode all at once.
The Venezuelan Public Debt Crisis: A Concise Introduction
Financial public debt in Venezuela increased by 2007, partly boosted by the consumption boom triggered by the commodities' super-cycle. In addition, nonfinancial debt was raised because of the expropriation policies and contractual breaches, particularly by Petróleos de Venezuela, S.A. (PDVSA). In 2014, when the signs of the economic collapse were visible, some suggested that Venezuela could default on its debt.
Maduro's government denied the default and kept repaying the debt despite the increasing economic collapse. The 2015 National Assembly's election created an additional obstacle when Maduro—essentially through the Constitutional Chamber—ignored the parliamentary controls. The National Assembly repudiated the fraudulent attempts to overcome those controls, particularly regarding public debt. Notably, the National Assembly urged the government to renegotiate PDVSA's debt. But the government decided to continue the debt repayment.
By 2016, the default was likely. The swap of PDVSA's 2017 Notes by the 2020 Notes alleviated some of the financial pressures, although the National Assembly warned about the unconstitutionality of the collateral over Citgo Holding, Inc.'s shares. The alleviation, though, was just momentary; at the beginning of August 2017, the default was considered, by many, as imminent.
At the end of August, the U.S. government extended the sanctions against new PDVSA's debt and government bonds. "Venezuela will never default," Maduro announced on November 12, 2017 (author´s translation). The next day, S&P declared Venezuela in selective default.
Since November 2017, Maduro's government has assured a debt restructuring. He never fulfilled this promise, among other reasons, because any debt restructuring would require the 2015 National Assembly's control, which Maduro decided to ignore. As for 2018, massive debt litigation (regarding financial and nonfinancial debt) was considered a probable scenario.
But the unexpected happened on January 23, 2019: a government change in Venezuela. Not in terms of a democratic transition but at least in terms of government recognition in the United States. That day the legal representation of the Venezuelan government shifted from Maduro to the speaker of the National Assembly acting as interim president.
The recognition of the interim president had significant legal consequences regarding the debt because U.S. law governs financial debt. In addition, many nonfinancial claims were filed before U.S. courts in an attempt to seize Citgo's shares. Despite the lack of control over the territory—and, indeed, over public finance—the interim president was exclusively responsible for the legal consequences of the debt default in the United States.
To face those challenges, in July 2019, the interim presidency published the guidelines for the imminent debt renegotiation, which should begin once the usurpation by the regime of Nicolas Maduro has ended. A creditor committee opposed some aspects of the guidelines. But it seemed that the debt crisis could finally be tackled as part of the Venezuelan transition.
Nevertheless, the transition never came. Maduro kept his unfulfilled promises of a debt renegotiation, even proposing a tolling agreement in 2021 to deal with the statute of limitations risks. The proposal did not advance because only the interim president exerted the legal representation of the Venezuelan government in the United States. But due to severe disagreements with the political parties of the 2015 National Assembly, the interim government actions slowed to the extreme that, at the beginning of 2022, it abandoned all the strategies regarding debt restructuring.
The political situation deteriorated even further when the 2015 National Assembly disbanded the interim presidency on January 3, 2023. As a result, there is no legally recognized Venezuelan government in the United States: the National Assembly has yet to be deemed the holder of the presidency's authorities. At the same time, Maduro is still regarded as an illegitimate government.
Creditors look hopeless without a recognized government of Venezuela in the United States and without a debt strategy. They have been waiting for a debt restructuring, a government change, or an economic miracle for so long—and they cannot wait forever.
Eight Problems and Eight Solutions
The many legal problems regarding the Venezuelan debt could be classified into eight categories. For each of those categories, a solution is proposed:
- The need for a recognized government in the United States that can legally represent Venezuela in the United States: The U.S. government should recognize a Government of Venezuela to restore the legal capacity to represent the Republic of Venezuela and PDVSA before the creditors. Eventually, the U.S. courts could grant some degree of representation to Maduro, even as an unrecognized government, considering that, since January 3, 2023, there is not a de jure interim president. The only decision that could prevent this outcome is the recognition of a de jure Venezuelan president by the U.S. government—but it is still being determined if the National Assembly could be recognized as such.
- A broad political agreement in Venezuela regarding the debt crisis: As Chatham House suggested, one way to achieve this objective is to include the debt problem in the Mexican negotiations. The bottom line is that negotiations cannot be restricted to the rights over external assets.
- The holistic perspective of debt renegotiation: Debt renegotiation is not only associated with financial debt but also with nonfinancial obligations, mainly based on expropriation policies. Following the Iraq experience, Venezuela should assess debt claims reconciliation—again, as part of the broader political negotiations. Also, a renegotiation must consider the binational debt regarding the Paris Club and China, a new player in debt restructuring.
Partial solutions should be avoided. Past measures that only favored some creditors—for instance, PDVSA's contractors—have not solved the debt crisis and could result in additional problems if other creditors considered their rights had been discriminated against.
- The six-year statute of limitations that, according to the New York Law, could expire at the end of 2017: Two possible solutions exist. In the first one, creditors could file claims before the U.S. courts to protect their rights; in the second solution, they can enter into a tolling agreement with the government of Venezuela. Without a legally recognized government in the United States, any of those solutions face several obstacles. Of course, even the financial debt, which could have expired, could be included in a future Venezuelan renegotiation. However, without the judicial enforcement of the debt rights, it could be risky to trust in the goodwill of a forthcoming new government in Venezuela.
- Debt litigation: The claims filed by creditors have continued, but with a new complication: the lack of a government that can dully represent Venezuela, increasing the risks of default judgments. Litigation risks could be reduced by tolling agreements or stipulated judgments as part of a holistic approach.
- Citgo: The PDVSA's affiliate has registered record profits but faces several challenges due to the attachments against its Delaware holding company. Recently, the Delaware Court issued new attachments. Sanctions prevent the public sale of those shares without a license—but this is a weak and unstable protection. Also, the 2020 Notes litigation—in which PDVSA challenged the collateral over Citgo—is pending before the New York Court of Appeals, and a ruling should not be expected in the short term. Additionally, OFAC has renewed the suspension of the license that authorizes bondholders to foreclosure Citgo Holding, Inc.’s shares—extending an additional protection layer.
The good news is that there are no imminent risks of a Citgo seizure. But the temporal protection mechanisms designed in 2019—when the transition was considered imminent—cannot endure. The only stable solution to Citgo's troubles is a debt restructuring process. Continuing to differ the risks without a strategy is not an option.
- Sanctions: They are a double-edged sword: on the one hand, the current sanction framework prevents debt restructuring; on the other, sanctions act as supplementary asset protection measures. Because there is no debt strategy, the only option has been to maintain the status quo—but nothing last forever.
Rather than define a strategy based on lifting the sanctions—which looks unlikely—it is better to design innovative solutions that could be implemented under the current framework. For that purpose, the debt crisis could be transformed into an incentive for negotiations to pave the way to specific and gradual sanctions relief. Those negotiations could also facilitate the review of the trading ban. Other ideas could be explored: the U.S. government could contribute to the debt reconciliation process, for instance, based on the Foreign Claims Settlement Commission. Licenses could also pave the way to transparent debt-for-equity agreements.
- Humanitarian aid: Without a stable solution to the debt crisis, Venezuela will face several issues in mobilizing external assets to alleviate the suffering of the Venezuelan people. The current oil and gas licenses issued to Chevron and Trinidad and Tobago have created further problems because any revenue is diverted from the national budget—depriving the possibility of financing humanitarian aid with oil and gas revenues.
Innovative solutions to the Venezuelan debt problem could also create incentives to unlock the political difficulties surrounding the social fund's practical implementation, which Maduro and the Unitary Platform agreed to develop on November 2022.
Waiting for Godot
Because the Venezuelan transition is stalled, an option could be to sit down and wait until the 2024 presidential election, hoping that the new government that will begin functions on January 10, 2025, will take care of the debt problem.
Since 2014, the creditors have been waiting for Godot. In 2015 Maduro said he trusted that God would solve the country's economic problems. In 2019, the opposition waited for the imminent cessation of the usurpation. Oil licenses created the illusion of an economic miracle. And yet, nothing has happened.
There is no deus ex machina for the Venezuelan debt crisis. Rather than waiting for Godot, the debt could be turned into a constructive strategy that increases the probability of a negotiated and amicable solution, as part of the Mexican talks, with the immediate goal of alleviating the suffering of the Venezuelan people.
Who should take the initiative? The 2015 National Assembly seems lost in transition, while Maduro faces several internal problems. Besides, the reduced political attention in Venezuela appears to be focused on the opposition primary initially scheduled for October 2023—just in time for the statute of limitations.
Maybe creditors could take the initiative. But there could be a collective action problem because they have different interests and tactics. Eventually, the bondholders could assume the helm because of the necessity of addressing the statute of limitation risks.
It is just a matter of time. Either there is a sound and pragmatic plan, or the debt problems will finally explode all at once.
José Ignacio Hernández is a non-resident senior associate with the Americas Program at the Center for Strategic International Studies in Washington, D.C.