Is a New Government Venezuela’s Only Hope?

Venezuela is experiencing one of the worst economic crises in history, and by far the worst in its history.[i]  With its debt exceeding over 100% of its GDP, hyperinflation over 400%, an unemployment rate around 20%, and the inability of Venezuela to repay its bond holders, Venezuela’s future economic stability looks bleak.[ii]  This economic crisis has led to a shortage of basic necessities for its people, such as food and medicine.[iii]  Because of this situation, many are pointing fingers at its current president, Nicolas Maduro, because he and his predecessor, Hugo Chavez, took a country that holds the largest supply of crude oil and ran it straight into the ground.[iv]  With an inevitable default looming in the near future, the main issue is how Venezuela plans to pay its sovereign debts going forward.  Arguably, Venezuela can only pay its debt and move forward if a new government is put in place. With presidential elections set to take place in April of this year,[v]  there still may be hope for Venezuela.

From a legal perspective, the new regime would hopefully accomplish two things for Venezuela and its national oil company, Petróleos de Venezuela, S.A. (PDVSA), which generates about ninety percent of Venezuela’s revenue.[vi]  First, it will hopefully result in the United States lifting its sanctions.  Second, it will allow Venezuela and PDVSA to restructure in order to pay its bondholders and prevent holdout creditors. The United States has placed sanctions on Venezuela because of the corruption and political oppression under the current regime.[vii]  The sanctions are a way to try and force Maduro and other government officials out of office and to protect American bondholders by preventing its citizens from buying Venezuelan and PDVSA bonds.[viii]  With a new regime in place, it is the hope that the new government will learn from these mistakes and provide an opportunity for Venezuela to get back on its feet.

Once the sanctions are lifted, Venezuela and PDVSA can shift their attention to how they want to restructure.  Barring a massive investment from Russia, China, or the International Monetary Fund, Venezuela is going to run out of money—the last reported number Venezuela had in reserves was less than $10 billion, and that was July of last year.[ix]  Because of this, Venezuela is going to default, and it will be sooner rather than later.  Fortunately, a new regime change has court options and out of court options to restructure.[x]  Through the courts, Venezuela can try and obtain relief through a Chapter 15 bankruptcy.[xi] This, however, presents its own problems. Venezuela would have to pass a new bankruptcy law, which they do not have any already, PDVSA would have to meet the eligibility requirements, the US courts would have to recognize the bankruptcy, and then the plan would have to be confirmed.[xii]  A tall task but not insurmountable. Or, Venezuela and PDVSA can look to out of court options in order to restructure. For example, bondholders of PDVSA and Venezuelan bonds can utilize exit consents (voting thresholds) to change contract terms to coerce potential holdout creditors to agree to a restructuring plan.[xiii]  This could work but would surely lead to litigation every step of the way.

In conclusion, Venezuela faces a rough road ahead, and a lot of tough decisions will have to be made. However, all hope is not lost, but a new government needs to step in and step up for its people if they have any chance of rebounding from this dire economic situation.

 

[i] Venezuela’s Worst Economic Crisis: What Went Wrong?, al jazeera (May 3, 2018), http://www.aljazeera.com/indepth/features/2017/05/venezuela-worst-economic-crisis-wrong-170501063130120.html [https://perma.cc/2QXF-BK9R].

[ii] See id.

[iii] Patrick Gillespie et al., Venezuela: How a Rich Country Collapsed, cnn money (July 30, 2017), http://money.cnn.com/2017/07/26/news/economy/venezuela-economic-crisis/index.html [https://perma.cc/K98Q-9VL2].

[iv] Id.

[v] Venezuela Presidential Election Ordered by end of April, al jazeera (Jan. 23, 2018), http://www.aljazeera.com/news/2018/01/venezuela-presidential-election-ordered-april-180123180405804.html [https://perma.cc/D6JM-PFWF].

[vi] Dion Rabouin, Venezuela Default More Likely on Sovereign Bonds Than PDVSA’s: Bondholders, reuters (Dec. 15,2017), https://www.reuters.com/article/us-venezuela-debt/venezuela-default-more-likely-on-sovereign-bonds-than-pdvsas-bondholders-idUSKBN1E92UX [https://perma.cc/RT2V-2YY8].

[vii] Patricia Mazzei, U.S. Sanctions Four More Venezuela Officials, N.Y. times (Jan. 5, 2018), https://www.nytimes.com/2018/01/05/world/americas/venezuela-us-sanctions-maduro.html [https://perma.cc/5VF9-UBE4].

[viii] See id.

[ix] Patrick Gillespie, Venezuela has Less Than $ 10 Billion—Lowest Reserves in Over 20 Years, cnn money (July 17, 2017), http://money.cnn.com/2017/07/17/news/economy/venezuela-reserves-20-year-low/index.html [https://perma.cc/K2AB-8697].

[x] See Gulati & Mark Weidemaier, PDVSA’s Debt Restructuring: The Chapter 15 Option, credit slips (Feb. 8, 2018) [hereinafter Gulati & Weidemaier Chapter 15], http://www.creditslips.org/creditslips/2018/02/pdvsas-debt-restructuring-the-chapter-15-option.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+creditslips%2Ffeed+%28Credit+Slips%29; Mark Weidemaier & Mitu Gulati, Marblegate and the Use of Exit Consents to Restructure (Venezuelan) Sovereign Debt, credit slips (Feb. 25, 2017)[hereinafter Weidemaier & Gulati Exit Consents], http://www.creditslips.org/creditslips/2017/02/marblegate-and-sovereign-restructuring.html [https://perma.cc/Q5JW-9HHZ]; see also Marblegate Asset Mgmt., LLC v. Educ. Mgmt. Fin. Corp., 846 F.3d 1 (2d Cir. 2017).

[xi] Gulati & Weidemaier Chapter 15, supra note 10.

[xii] See id.

[xiii] See Mark Weidemaier & Mitu Gulati Exit Consents, supra note 10.