Caracas debt swap to ease default fears

<a href=news.ft.com>By Andy Webb-Vidal in Caracas Published: April 2 2003 5:00 | Last Updated: April 2 2003 5:00

Venezuela's finance ministry on Tuesday began revamping plans for a voluntary external debt swap in the weeks ahead, a move that bankers said would be essential to prevent a default on foreign debt payments.

Tobías Nóbrega, finance minister, was due to meet US investment bankers to define a plan to exchange a portion of the country's $22.4bn (£14.1bn) external debt, on which a raft of interest payments are due in June.

President Hugo Chávez unnerved capital markets last week when he said the country was unable to meet all of its debt payments this year as a result of the damaging, opposition-led strike at Petróleos de Venezuela (PDVSA). The action halted production in the world's fifth-largest exporter in December and January.

The state-owned oil company supplies about half of government revenue, and Mr Chávez said the country would need to "restructure" its debt. His remarks appear unwittingly to have derailed the finance minister's plans for a euro-denominated debt swap due to be offered later this month.

Oil output in Venezuela has recovered from the strike faster than many analysts expected, and government officials claim production levels are currently at around 3m barrels per day.

On paper, relatively high crude oil prices, due to the US-led war in Iraq, have also boosted export revenues. However, the government is struggling to cope with a cash-flow crunch because it has fired more than 16,000 employees at PDVSA, including its trading department, and it is owed at least $1.5bn in back-export income that it has been unable to collect.

Meanwhile, central bank international reserves have remained steady, at just over $12bn, because foreign currency trading has been suspended since January, and the government agency in charge of dollar sales has only begun to release a trickle of dollars this week.

The dearth of dollars is causing severe problems among many companies in Venezuela, especially manufacturers. General Motors' local car assembly plant stopped production last week because it was unable to import essential parts.

A pending ruling by the Supreme Court which could require the government to lift the ban on foreign currency trading could prompt reserves to decline rapidly, raising the risk of default, economists said.

"After Chávez's comments, bondholders are worried that the willingness to pay may not be there," said José Barrionuevo, director of strategy at Barclays Capital.

Concerns over the possibility of a default were also growing on Tuesday after a central bank source confirmed that in the past few weeks the bank had transferred some of its international reserves to the Bank for International Settlements in Basle. Funds held at the BIS cannot be seized in the event of a foreign debt default.

Also, a 150-page internal analysis report on the repercussions of a foreign debt default is understood to have been prepared for Mr Nóbrega, finance ministry sources say. Mr Nóbrega declined to comment.

Economists say oil prices will have to remain relatively high for Venezuela to avoid a default, and much will depend on the duration of a war in Iraq.

There is a also a risk that output volumes will decline in the weeks ahead because of low maintenance of oil wells.

"The financial situation is manageable but extremely critical," said Tamara Herrera, economist with the consultancy Síntesis Financiera.