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Alter Ego and Alter Id, Venezuela Edition

posted by Anna Gelpern

Venezuela is really really careening sideways into chaotic default. We know this not just because it has been missing payments and the ISDA Determinations Committee said so, but also because the government seems to be in a hurry to hand out what assets it might have to what claimants might show up on its doorstep with a credible threat to do ... something. ... or just to make them go away and buy another five minutes of delusional gambling for resurrection.

I make this obvious observation because Venezuela has been fixing to default for so long that gaming out the default and restructuring possibilities is getting too sophisticated for its own good. Assumptions of rationality are running wild. Witness the discourse over the (fascinating) alter ego and veil piercing theories. The question is how much longer do Venezuela and PDVSA get to pretend they are separate debtors with separate assets in a world where both have creditors trying to get their hands on any and all assets of either or both. There is lots and lots of law on alter ego and veil piercing, all brilliantly unpacked elsewhere by Mark and Mitu. It was a live issue in the Crystallex arbitration enforcement case, which just settled. My hunch is that by the time another court gets to consider the issue, Venezuela and PDVSA will have become one out of sheer random desperation.

After all, why would the Maduro government settle with Crystallex now, and for a reportedly handsome sum? Even if Crystallex were closing in on Venezuela's or PDVSA's assets (I doubt it), why give up more than one-tenth of your scant reserves to pay them ahead of other claimants--to live to fight another day? If that is the modus operandi, I would expect lots more random asset dissipation in the coming weeks, most of it out of public sight. By the time all the bonds are in default and all the bondholders are organized to sue and collect, the cupboard might be empty. Whether PDVSA will eventually file for bankruptcy someplace, and whether the trustee or some creditor would then try claw back some of these twilight giveaways as fraudulent transfers, is an interesting question for another day.

For now, we are mucking around in the dark, chaotic, irrational sovereign id. Legal doctrines and market institutions designed to deal with rational malfeasance are a tricky fit.


Changes in PDVSA's "upper management" (ie. the appointment of a Major-General as new President / Oil Ministry) certainly seems to suggest that the rational, market friendly, option is ruled out. Military decision making is a radical different one from what we have witnessed in Venezuela's NOC in the past years. Hard to see how EM wishful thinkers will try to keep pricing in Venezuela's debt up. Anything goes

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