US pressure and threats to prevent Venezuela restructuring its debt

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Mision Verdad, November 9th 2017

The US Treasury has threatened holders of Venezuelan bonds that it would be problematic for them to deal with Venezuela’s executive Vice President Tareck El Aissami and the country’s Economy Minister Simon Zerpa, also head of finance for Venezuela’s State oil company PDVSA. El Aissami and Zerpa are Venezuela’s main financial negotiators and the US government applied sanctions against the two fo them this year.

The development followed President Nicolas Maduro invitation to Venezuela’s creditors last week to meet in Caracas on November 13th for talks on restructuring payment of US$60 billion of Venezuela’s bonds.

A financial terror campaign on steroids

Venezuela’s debt payments this year anticipate projections for payment of around US$8 billion in 2018 which will now be restructured.

Even though creditors are not forbidden under General License 3 of Donald Trump’s August 3rd decree from participating in talks on Venezuela’s bonds, the US Treasury has now said that any deal with El Aissami and Zerpa, both on the US Treasury’s list of Specially Designated Persons, could be problematic, without referring directly to negotiations as such or to whether a possible agreement might break US law. The US Treasury went on to note that possible penalties for US citizens could mean up to 30 years in prison or fines of up to US$5 million. In the case of financial institutions, the fines could go up to US$10 million.

In coordination with the US Treasury pronouncements, Venezuela’s opposition media have supplemented the US threats with “anonymous statements” supposedly implying that creditors are not planning to participate in the November 13th meeting in Caracas allegedly on account of lack of comfortable facilities for the investors and fears about violence in Venezuela’s capital.

Along with news of this latest US threat against Venezuela, international financial media also reported that on November 8th a creditor of PDVSA’s 2017 bonds asked the International Swaps and Derivatives Association to determine whether the oil company had fallen into non-payment which would activate insurance payouts for credit non-compliance.

The Venezuelan authorities announced on November 3rd the start of the procedure to pay US$1.1 billion in capital and interest on the 2017 bond that expired on November 2nd.

The ISDA stated that “the 2017 bonds issued by the reference entity (PDVSA) expired on November 2nd 2017 with a payment of the expired principal. Following the end of the grace period for claiming non-payment insurance, the principal has not been received.” Now ISDA members need to vote on whether or not to accept the creditor’s question about non-compliance and then discuss how to respond to it.

All of which amounts to rumors, misgivings, disinformation and yet more threats…

The Trump administration’s objective – thwarting Venezuela’s debt restructuring

These maneuvers against Venezuela are based on a multifaceted attack. Although the attack’s internal allies have been arrested by the Attorney General’s office, imports and dividend payments in dollars have halved compared to 2016, because the US Treasury has organized an assault via US banks withholding notes of credit US oil refineries need to be able to pay for Venezuela’s crude oil. That is on top of the fierce financial terror campaign by news agencies like Reuters and a long list of anti-Chavista information media.

In 2015, the United Nations approved an initiative of Argentina supported by the Group of 77 + China proposing nine principles for a nation to restructure its debt. Among the most important was the principle that if a debt renegotiation is approved by a “qualified majority” the renegotation must be accepted by the remaining bond holders. This is why efforts are being made to sabotage the November 13th meeting in Caracas. The first of those nine UN principles states that a restructuring of sovereign debt “should not be frustrated or obstructed by abusive means.”

The financial terror campaign aims to sabotage any debt restructuring based on the Collective Action Clause of Venezuelan bonds that would allow a majority of creditors to agree a legally binding restructuring for all bondholders making it obligatory for minority bond holders to accept. It is worth noting that this would render inapplicable President Trump’s August Executive Order forbidding a possible restructuring agreement. An analysis by two US lawyers specializing in public debt,, Lee C. Buchheit y Mitu Gulati, explains that PDVSA could propose a swap of independent promissory notes, include them in any restructuring and turn those bondholders into preferred creditors.

According to the lawyers, PDVSA should get widespread acceptance from so-called holdout bondholders and so-called vulture funds for a successful negotiation because this swap mechanism would put “creditors in a dilemma : either they accept the swap and take a future restructuring... or they hold on to current PDVSA bonds.”

Almost all Venezuela’s current sovereign debt has Collective Action Clauses with an average qualified majority of 80%. This mechanism could work in favor of a possible restructuring of PDVSA’s debt with a large number of bond holders, thus reducing the US Treasury’s ability to declare any agreement illegal based onPresident Trump’s Executive Order of last August 25th.

Now Russia and Venezuela have agreed to restructure Venezuela’s debt, it is more urgent for the United States government to force the possibility of a default so as to affect Venezuela’s financial credibility and prevent Venezuela’s debt payments. The financial terror campaign seeks to bring about non-payment so as to deepen its projection of Venezuela as an unstable country with doubtful ability to make payments on time. Self-evidently, the support of China and Russia for Venezuela’s debt restructuring represents a geopolitical counterweight with major influence in financial markets which the US needs to roll back.