What's going on?
The government of Venezuela is starting to default on some of its debts to international investors… and it’s not entirely clear how either is going to manage this unfolding saga.
What does this mean?
As things currently stand, the Venezuelan government owes about $140 billion to a variety of foreign creditors, and it’s recently missed a few payment deadlines (the economy has been in a downturn for a while now, meaning the government is likely short on cash). Two major credit rating agencies have declared Venezuela to be in default. The government, for its part, claims that it’s merely been delayed in paying some of its debts, while admitting it would like to explore rescheduling some repayments to creditors.
Why should I care?
For markets: Venezuelan government bonds (essentially loans that it has promised to pay back) have dropped in value.
These high-yielding bonds haven’t collapsed in value altogether, which signals that some bondholders still think they will at least get paid something. Through its valuable state-owned oil company, Venezuela holds significant offshore refining assets in foreign countries. These could be seized if courts there rule that the government has to pay back burned investors – and Venezuela might eventually cough up some of the promised cash to investors to avoid that.
The bigger picture: Sanctions, bad economic management and a sinking oil price have spelled misery for Venezuelans.
Oil production, one of the key sectors in the Venezuelan economy, has struggled in recent years as the oil price has declined (although it appears to be back on the up lately). This helped cause a recession and put pressure on state coffers, while the socialist government’s mismanaged control of prices and production has led to shortages in the economy.