Here's What Could Happen to Venezuela's Messy $170 Billion of Debt

SPEAKER_2 (0:02)

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Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe, Venezuela.

Joe Weisenthal (0:25)

Venezuela week.

Tracy Alloway (0:26)

So we've done the oil market. We gotta do the debt market.

Joe Weisenthal (0:29)

We gotta do the debt market. I don't know anything about this stuff, so we gotta do it.

Tracy Alloway (0:33)

One of the reasons that I really like covering the debt market, bonds, is because I think we're used to thinking of bonds as contracts, but I always like to think of them more as stories. So they're full of all these narratives and embedded values and history. There's actually a great quote from Margaret Atwood. She wrote this whole book called Payback on Debt, and she describes it as a story or a memory of who owes what and why. Of course, if you're talking about a story or a narrative, those can change over time, right?

Joe Weisenthal (1:09)

Absolutely. One thing I know is that just since Saturday morning in the early trading, I think the existing defaulted Venezuelan debt that's out there, I think it's rallied, I think it's gone up.

Tracy Alloway (1:19)

Oh, yeah.

Joe Weisenthal (1:20)

But I don't understand, you're trying to get the economy going again, you're going to make everybody pay for this money that was borrowed by someone who the international community regards to be legitimate as a dictator. If anything, shouldn't the creditors that facilitated his ongoing rise, shouldn't they have to pay, not only should they not get paid back, shouldn't they pay the people of Venezuela extra for having subsidized someone that is widely regarded to be a criminal? We're calling this guy a narco terrorist, and yet, so it's like, shouldn't we punish the people who lent to him?

Tracy Alloway (1:54)

Maybe you should be on the restructuring team, Joe. No, but it's true. So this is the debate. So you're right, bonds have rallied. So there's Venezuelan sovereign debt, but there's also debt issued by Pedevesa. And those have gone from like 5 cents on the dollar a few years ago to more than 30 cents. So people are already making money. And the bet here is that there is going to be some sort of restructuring, and they're going to get more money. And of course, the creditors, the investors always want more. Meanwhile, there's a strong argument that the Venezuelan people should have their debt load alleviated in some way.

Joe Weisenthal (2:30)

Yeah, I'm in favor of a negative recovery.

Tracy Alloway (2:32)

Okay. All right. Well, we really do have the perfect guest to talk about all of this. Someone we've had on the show before, but it's been a while. We're going to be speaking with Lee Buchheit. He is a retired lawyer now. He's had a 40-year legal career, worked on more than two dozen sovereign debt restructurings, including Greece and Iraq, and that's going to be relevant to this conversation. So really, the perfect guest. Lee, welcome back to the show.

Lee Buchheit (3:02)

Thank you, Tracy and Joe. Good to be back.

Tracy Alloway (3:05)

Maybe just to begin, can you sort of set out the scene of the creditors and the debt that Venezuela actually owes? Who owns those bonds and how much debt are we talking about?

Lee Buchheit (3:20)

In total, probably now, the Venezuelan debt is someplace between 150 and 170 billion. Not all of that is bonds, and that's one of the issues that we should discuss. The bonds that we're talking about are principally Republic of Venezuela and Petavesa bonds, roughly split 50-50. They were issued during the Chavez and early Maduro periods. They went into default, all of them, in the fall of 2017 You remember Mr. Trump in his first term imposed sanctions on Venezuela in August of 2017

The response was to have the bonds go into default, and they have remained in default since then. One of the difficulties that Venezuela will face in restructuring its what I call legacy debt stock is that there are all kinds of other liabilities that are not in the form of bonds. So there are unpaid trade creditors. There are holders of arbitration awards, chunky arbitration awards. There are people with blocked deposits in Venezuela. And so the restructuring, when and if it comes, will not be the simple homogenous kind of restructuring that we're used to where there are bonds or in the old days, bank loans. This is going to be a much more diverse creditor group.

Joe Weisenthal (5:04)

Is there a formal hierarchy that exists either in written law or in norms that sort of establish who comes first when we have these multitude of instruments? Or is it the type of thing where the conditions of each country, depending on what they are, et cetera, and maybe the conventions, not necessarily written down the same way in formal law, will help sort of determine that waterfall, I suppose.