Venezuela is making 'surreal, suicidal' debt payments

Venezuela just made a full payment on a $1.5 billion bond, but the country is hardly out of the debt woods yet. Experts say the country, plagued by hyperinflation and a shortage of basic goods, will almost definitely default — the question is how, and when.

Venezuela's central bank said earlier this month that the country's economy shrank 5.7 percent, and the official rate of inflation came in at 180.9 percent in 2015. That spells trouble for the country, which has a $10 billion total debt burden for the year.

Still, the country has been able to maintain its obligations by draining its foreign currency and gold reserves — even as its citizens struggle in a deep recession. That's despite suggestions from some quarters last year that the country could default in 2015.

In a Spanish-language statement on its website, the Venezuelan finance ministry said its debt payment on Friday was proof of "willingness and capacity to honor its financial commitments in a timely manner," but the boast of an "impeccable" payment record doesn't address a more interesting question: Why is Venezuela willing to go so much further to pay its debts than many other struggling countries are?

Marco Bello | Reuters

A woman walks past empty shelves at a drugstore in Caracas, Venezuela, February 23, 2016.

"They always find ways to pay: These guys are really scraping the bottom of whatever," Diego Ferro, co-chief investment officer at Greylock Capital, said Thursday during a panel discussion on Venezuelan debt. "The willingness to pay that, they have shown, is just surreal, suicidal, crazy, you can define it how you want."

Even so, he added, "my sense is that they really run out of everything at the beginning of next year."

It remains an open question, however, whether Venezuela will see a default or debt restructuring under President Nicolas Maduro, or if political unrest will spur a new government to come in and negotiate with creditors, Ferro said.

Others at the panel were even less optimistic. Martin Schubert, CEO at European InterAmerican Finance, said he is watching an October payment from state-owned oil company PDVSA.

"There is a big difference between having the willingness to pay and having the ability to pay," he said, adding that the price of oil will be key to how much liquidity Venezuela has to meet its obligations.

Venezuelan default: Worse than Argentina?

Moody's analyst Jaime Reusche said his agency's Caa3 rating includes an assessment that there is an 80 percent chance of Venezuela seeing a default or debt restructuring, with a base-line assumption apparently for the fourth quarter of this year.

But Ferro argued that Venezuela is likely so adamant about avoiding default because it sees some chance that its economic fortunes could improve with a sudden price increase in oil.

"What if oil goes back to 50 or 60" dollars per barrel? Ferro asked during his appearance at the Americas Society/Council of the Americas panel. "So keep the oil option open, maybe you get lucky, maybe something happens to Iran, maybe Iran and Saudi Arabia get into a war, who knows? You get oil higher and they can continue doing all the things they've been doing."

At its core, Venezuela's problem is different from the troubles faced by Argentina in recent years, as it has tremendous potential wealth in the form of the world's largest proven oil reserves. Ferro contended that the government's policies have caused undue stress on a country that would otherwise be prosperous.

"This is more an issue of liquidity than solvency," he said. "Run the right way, Venezuela should be a very rich country."

It’s getting harder for Venezuela to feed itself

And that expectation could be part of why the country has evidenced its extreme willingness to pay its debts: It doesn't want to risk a court putting a lien on productive oil infrastructure assets.

Oil remains well below $40, and some traders have suggested it could go much lower.

Venezuela has been floating the idea of a producer freeze on output that could help support the price. Oil prices began a slide from above $100 a barrel in mid-2014, but OPEC has declined to trim production without help from nonmembers, which so far have refused to participate.

A production freeze could amount to a compromise in that it would limit further increases in the supply glut that sent prices to a 12-year low of $27.10 a barrel last month, while not requiring countries to cut supply and give up market share.

— Reuters contributed to this report.