Venezuela Bad Debts Pile Up

Venezuela moved closer to a possible all-out default, with ratings agency S&P Global saying the country had failed to make repayments on two more loans.

The oil-rich, cash-poor South American country failed to make $237 million in payments on bonds due 2025 and 2026, now past their 30-day grace period, the US ratings firm said in a statement, AFP reported.

It warned of a “one-in-two chance that Venezuela could default again within the next three months. Two additional coupon payments are overdue, but within their grace period. We could lower the ratings on the following issues to 'D' if the government fails to pay within the stated grace period,” S&P Global said.

It and other ratings agencies had already declared Venezuela and state-owned oil company PDVSA to be in “selective default” due to the late payments on multiple bond issues.

The piling up of bad debt pushes Venezuela ever closer to a point when either it will declare outright default of all its sovereign and PDVSA debt—or creditors do. Such a scenario could see creditors’ lawyers line up in US courts to demand the right to seize Venezuelan assets abroad.

If PDVSA tankers, oil shipments and refineries were grabbed, that would cripple Venezuela’s ability to sell its crude—and the oil company is the primary source of income for the country, which sits atop the world’s biggest oil reserves.

The country has an estimated debt burden of up to $150 billion, yet less than $10 billion in hard currency reserves.

US Sanctions

It had been up-to-date on principal payments on its loans until early this month, when Venezuela’s President Nicolas Maduro said he wanted to restructure the sovereign and PDVSA debt.

The country has to pay back at least $1.47 billion in interest on various bonds by the end of the year, and then about $8 billion in 2018.

S&P said it would “very likely” consider any Venezuelan restructuring equivalent to a default. “In addition, in our opinion, US sanctions on Venezuela and government members will most likely result in a long and difficult negotiation with bondholders,” it said.

The idea of Venezuela ending its debt payments is seen as a possible short-term political gain for the country’s largely unpopular president. He is expected to seek re-election in 2018.

If Maduro stops debt payments, or declares default, the money could be used to buy imports and do election campaigning. It would also decrease the risk of street protests.

Currency Collapse

Venezuela's money is nearly worthless, and its cash crisis is only getting worse. The country is spiraling further into a humanitarian disaster spurred by the government's economic policies, which have caused the currency, the bolivar, to plunge in value and prices to skyrocket. Food and medicine shortages have been reported across Venezuela.

The bolivar has lost 96% of its value this year. As of Tuesday, it took 84,000 bolivars to buy an American dollar. At the beginning of this month, a dollar was worth 41,000 bolivars. And at the start of this year, it only took 3,100 bolivars to buy a dollar, according to DolarToday, a website that tracks the unofficial exchange rate, CNNMoney reported.

Millions of Venezuelans look at DolarToday or another site, Paralelo Venezuela, to find out how much money they need to buy groceries—if there's food on the shelves at all. The government's official exchange rate has been deemed meaningless.

Inflation in Venezuela has soared to 4,115% compared with a year ago, according to Steve Hanke, a professor of applied economics at Johns Hopkins University, who is an expert on hyperinflation. The crisis has deepened since the government defaulted on some of its debts.

"The economy is really in a complete death spiral," says Hanke. "It's gotten a lot worse there in the last two weeks."

Other estimates are lower than Hanke's but exorbitant by any country's standards. The Venezuelan research firm Ecoanalitica estimates that prices spiked about 1,430% in October compared with a year ago. Prices at hotels and restaurants were up 70% in October from the month before.

Soaring prices force Venezuelans to wait hours in line at the ATM, the supermarket or both, just to get by. And things could get worse soon.