Brazil and Argentina must prepare joint plan as Venezuelan debt default looms
After a historic election victory for the opposition in December 2015, Venezuela is heading for even deeper political and economic turmoil in 2016. International observers have warned of a possible Venezuelan default for years, yet contrary to what is generally believed, the Venezuelan governments of Chavez and Maduro have been reliable, always paying bondholders on time. Still, after President Maduro's decision to radicalize his economic policy after the election -- instead of, as some had hoped, normalize it -- even optimists are beginning to doubt Venezuela's capacity to service its foreign debt in the coming months. After inflation of around 275% in 2015, the IMF expects the rate to reach 720% in 2016, higher than any other country in the world. Considering the political deadlock in Caracas, the institution also forecasts the Venezuelan economy to contract by a staggering 18% over 2015 and 2016.
Venezuela's debt to private companies -- thought to stand above U$50 billion -- is already producing political consequences in the region. Uruguayan farmers staged strikes across the country last week pressuring the government in Montevideo to help them recover unpaid bills from Venezuela. Worries are growing about billions of unpaid debt to Brazilian companies as well -- indeed, a Venezuelan default would add to Brazil's economic woes, considering how much trade between the two has grown over the past decade. International airlines have sharply reduced flights to Caracas as they are no longer being paid, and several car plants have shut after the government stopped paying for imports.
Last week, UN General Secretary Ban Ki-moon announced that Venezuela, along with 14 other countries, had lost its voting rights in the General Assembly since it had not paid its membership fees. The decision is particularly embarrassing for Caracas -- and South America as a whole -- as Venezuela is currently a member of the UN Security Council and will hold its rotating presidency next month (even though Venezuela can still vote in the UNSC).
A price of $75 per barrel is generally though to be necessary to assure that Venezuela's government can balance its budget. After policy makers in Caracas recently failed to convince OPEC members to reduce production to help boost prices, a sell-off in sovereign bonds put the price on benchmark 2026 to 37 cents, seen as a precursor to default. As Venezuela will need to use around 90% of its oil income this year just to meet its obligations, including sovereign debt and money owed to China, investors are now pricing in an estimated 80% chance of default in 2016.
Considering that Venezuela's current government would refuse to work with the IMF, one of the world's leading sovereign debt restructuring lawyers has warned that Venezuela would face an Argentina-style legal drama if it defaults. The situation may be even more complicated since the Venezuelan government has signed a series of financial agreements with China over the past years, which makes Beijing senior to other creditors (like bondholders), thus turning Venezuela a risky place to borrow for years to come (because China collects its oil before Venezuela sells it elsewhere).
Such a scenario would be terrible news for both Venezuela and South America, establishing yet again a strong association between the region and sovereign default risk the reformers of the 1990s, led by Fernando Henrique Cardoso, have worked hard to overcome. It would also further reduce the risk of political conciliation. Yet while policy makers in Buenos Aires and Brasília can do little to reduce the risk of default, they must start developing a joint long-term plan of how to increase the pressure on both Maduro and the opposition to establish a constructive political dialogue over the coming years.
Those who believe Maduro's removal from office would end Venezuela's troubles are deeply mistaken and overlook that even in the midst of an economic implosion and a public health crisis, more than 40% of Venezuelans still voted for the government. Considering the opposition's track record, the end of chavismo could lead to a witch hunt which would do little to reduce polarization and promote conciliation. Brasília and Buenos Aires should jointly establish a broad dialogue with the government and all parts of the opposition -- both moderate and radical -- to help avoid such a scenario.
Macri's rise to power in Argentina, which led to a sharp change in position vis-à-vis the government in Caracas, may be helpful in this context. While the Venezuelan government (rightly) sees Argentina to be highly critical of Maduro, the opposition regards Brazil as rather aligned with the socialist government, thus establishing a necessary equilibrium makes the duo look like legitimate mediators by both sides. Another option would be to include Cuba and the United States to assure the acceptance of Venezuela's more radical wings on both the left and the right.
Lula's leadership in 2003, when Brazil's recently elected President successfully coordinated the "Friends of Venezuela" grouping to promote a dialogue between the government and the opposition, provides a useful example. Putting pressure on Venezuela to accelerate its integration into Mercosur (it currently does not participate in the trade negotiations with the EU, and says it will take until 2022 to sign all its treaties) will provide Brazil and Argentina with additional sticks should one of the two sides violate the basic rules of the game.
After their first official meeting, Argentina's and Brazil's Foreign Ministers Susana Malcorra and Mauro Vieira seemed eager to tackle the region's most urgent problems. The crisis in Venezuela provides a big first test whether the two can effectively work together.
Photo credits : EFE