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Who Went to Caracas Last Week?

posted by Mark Weidemaier

Mitu Gulati & Mark Weidemaier

More and more creditors are filing lawsuits against Venezuela, and we had been planning to do a post on how the dominos were falling. 

But then we came across a piece by Ben Bartenstein of Bloomberg about how some investors appear to be pursuing an alternate strategy, allowing bondholders to be compensated from oil-related activities. One can understand why creditors would rather have a future claim to oil revenues than litigate over unpaid bond debt. After all, Venezuela has huge oil reserves, and the current Venezuelan government is sure to lose power eventually. Although it may take a while, a government will eventually be in place capable of resuming oil production, and in that event, investors could make a bundle.

Good for investors, but terrible for the future government and the people of Venezuela. Having finally rid themselves of Maduro, they would have to deal with the fact that he and his cronies had either stolen the country's assets or pledged them in exchange for a temporary reprieve from creditors. This is not a new issue. It implicates the problem of odious debts, for which Venezuela is quickly becoming a poster child. (Ugo Panizza and Ricardo Hausmann have a nice piece about the need for Odiousness Ratings in the Venezuelan context.)

U.S. sanctions essentially prohibit U.S. persons and institutions from participating in a Venezuelan debt restructuring. Maybe the creditor group expects that a deal would require the end of the sanctions regime or a special license (i.e., an exemption). Or maybe the logic of a debt-for-oil exchange is that it’s not a restructuring, but a sale of oil. The sanctions permit Venezuela to sell oil into the U.S. (its largest customer). If today’s oil can be exchanged for cash, perhaps tomorrow’s oil can be exchanged for bonds?

Maybe this would work, if we were talking about litigating the unclear meaning of a statute in court. But sanctions operate largely at the discretion of the U.S. Treasury Department and reflect foreign policy objectives. Last year, some of the students in our debt restructuring class raised a similar possibility. Our instinct then, and now, was that schemes like this won't work. The logic underlying the sanctions, especially the restriction on a debt restructuring, is to starve the kleptocrats now in power, while preserving Venezuelan resources, to the extent possible, until there is a legitimate government. We can’t see OFAC granting a special license for this kind of deal. 

So then, who went to down to Caracas last week? Bartenstein does not name names. He does say that a creditor group sent an “envoy,” referencing two unnamed sources. Then, later, he includes this juicy bit (with our emphasis):

In a statement, the Venezuela creditor group . . . denied that it had sent anyone to Caracas to hold discussions. The group said it considers the National Assembly, which was stripped of its powers by the country’s authoritarian leader, Nicolas Maduro, in 2017, to be “the only legitimately elected body in Venezuela” and that it won’t negotiate with the Maduro regime.

That’s odd. If the creditors didn’t send anyone, did the envoy just.... go? Or is there magic in the phrase “hold discussions”? Perhaps the group did send someone, but only to “chat” or “listen” and not to “hold discussions” (no never!). And anyway, if the creditor group doesn’t recognize the Maduro regime as worthy of negotiation, it’s curious that lawyers from Dentons (which may be doing restructuring work for the government) were reportedly present.

Hopefully, Bartenstein will have a follow-up story soon.  We are starting up the debt restructuring class that we teach together at Duke and UNC on Tuesday. And this will be a wonderful topic to begin class discussions about.

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