Venezuela given debt default warning

By Andy Webb-Vidal in Caracas Published: January 9 2003 4:00 | Last Updated: January 9 2003 4:00

Venezuela will be forced to default on payments due to state oil company bondholders or on its domestic debt with private banks in the next few weeks if the government is unable to restart crippled oil production, bankers and oil industry officials said yesterday.

A five-week-old strike by opposition-aligned workers at Petróleos de Venezuela (PDVSA), who are putting pressure on President Hugo Chávez to resign or call early elections, has cut daily output from 3.1m barrels to about 300,000 barrels.

Employees loyal to the government have so far made minimal progress in restarting oil production, resulting in a collapse in export revenue. PDVSA sells its oil at between 30 and 45 days' credit, and executives at the company say cashflow has now dried up.

PDVSA has external debt of about $4bn (€3.8bn), and its next interest payment, of $150m, is due in February. The company could service the debt using money normally held in a $600m rotating fund held offshore, although it is not known whether the cash is still available.

"If I were the finance minister or treasurer of PDVSA, I would be negotiating right now [on] how to not go into default," said Luis Pacheco, until two months ago corporate planning vice-president of PDVSA. Senior PDVSA officials were due to meet US investment bankers in New York yesterday.

PDVSA has so far lost at least $2bn in unrecoverable earnings as a result of the ongoing strike, in turn severing the source of about half of government revenue.

However, analysts say there is no immediate risk that Venezuela, which holds about $11bn in international reserves, will default on its sovereign foreign debt.

The current fiscal liquidity crunch could nonetheless lead to the government defaulting on its domestic debt with private banks, a central bank official said.

Venezuela's domestic debt has trebled in size over the past three years, and totals about $6bn, accounting for an average of 40 per cent of banks' assets.

Local subsidiaries owned by Spain's BBVA and BSCH, which together account for more than half of the banking sector, and the domestically-owned Banco Mercantil, are the most exposed.

Private banks are already expected to see a sharp deterioration in the quality of their loan portfolios in the weeks ahead, given that many private companies are seeking to renegotiate their credits after remaining shut during the peak sales month of December.

Oscar García, president of Banco Venezolano de Crédito, said the banks' domestic debt levels are close to saturation point, rendering it highly unlikely that the government will be able to borrow to cover its immediate spending requirements.

"The possibility of default is very serious," said Mr García. "The government is practically insolvent, as it doesn't have a source of revenue because of the cessation of income from PDVSA, and the banks cannot buy more debt."

Venezuelan banks, which have become the most profitable in Latin America under the Chávez government, despite an economic slowdown, are expected to shut today as employees begin a two-day strike in sympathy with the oil workers.

Concern over the economy and the banking system prompted a run on deposits and a surge in demand for dollars yesterday, driving the bolívar currency down by 15 per cent to 1,646 to the dollar.