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Who Can Pay Venezuela's Debts?

AFP / The Economist

A battle for Venezuela's future


Who controls a country?



Venezuela, and its state-owned oil company Petróleos de Venezuela SA, have stopped making payments on a lot of their debts. Many of these debts are in the form of bonds governed by New York law, and so bondholders have sued Venezuela in U.S. courts asking for their money back. This is not, in sovereign debt cases, a foolproof approach: The court can tell Venezuela to give them their money back, but it can't make Venezuela do it; Venezuela is its own country and doesn't have to listen to U.S. courts. Still it might be good for bondholders, or at least bad for Venezuela, if the bondholders sue and get U.S. court judgments against Venezuela and PDVSA. Venezuela and PDVSA get a lot of their money by exporting oil abroad, and they own lots of assets in the U.S. in the form of PDVSA's refining subsidiary Citgo Petroleum Corp.; defaulted bondholders might be able to find ways to seize some of that oil or those Citgo assets to pay off their claims.

So Venezuela would like to defeat those lawsuits. It is not particularly easy to do that, given that Venezuela really hasn't paid the money; on the facts, this is a pretty straightforward case of default. But there is one weird complication, which is: Who is “Venezuela,” anyway? Actual power in Venezuela seems to mostly be in the hand of President Nicolás Maduro's government, but Maduro is isolated internationally and not recognized by the U.S. Call this government Venezuela-1. Meanwhile the dissident interim government of Juan Guaidó has international recognition but very little in the way of effective control of the Venezuelan state. Call it Venezuela-2. 

One basic procedural form of this question is, when someone sues Venezuela in a New York federal court, who shows up on the other side? Who represents Venezuela? The probable rough answer is that it is the government of Venezuela  as determined by U.S. law  (not Venezuelan law), which means effectively the government recognized by the U.S. State Department, which means Venezuela-2, Guaidó's interim government. 

But this raises a second, substantive question, which is: What is the point of suing Venezuela and getting a judgment against the interim government, when the interim government doesn't control Venezuela's oil or money or productive capacity or lawmaking apparatus or anything else? In theory, the idea in a case like this is you sue Venezuela and the court tells Venezula to pay and then Venezuela nods and accepts the order and pays you. It doesn't necessarily work like that in practice—Venezuela can disobey the court—but that's the idea. But here, you sue Venezuela and the court tells Venezuela-2 (Guaidó) to pay you and then Venezuela-1 (Maduro), the one with the capacity to pay you, just ignores the whole thing because they weren't involved. It's just weird.

Guaidó's lawyers are trying to take advantage of this oddity. Here are sovereign-debt experts Mark Weidemaier and Mitu Gulati :

Court papers defending against the two latest creditor lawsuits reveal an intriguing and innovative strategy. ... In filings made a couple of weeks ago (June 21, 2019), the lawyers for Venezuela (Arnold & Porter) raised three doctrines that one rarely sees in modern sovereign debt litigation for the simple reason that these ordinarily have little chance of success: impossibility, necessity and comity. …

The doctrine of impossibility (or impracticability) excuses a party's non-performance of its contract obligations when some event outside of that party's control, and not foreseen at the time of the contract, makes it difficult or impossible to perform, unless the non-performing party assumed the risk of such events. For instance, a blight might excuse a farmer's obligation to deliver grain (unless the contract assigned this risk to the farmer). 

Borrowers who cannot repay loans almost never succeed in arguing impossibility. The reason is that the law typically assigns the risk of non-payment to the borrower, no matter the reason for the borrower's inability to pay. ... Is Venezuela also an exception?

Perhaps. As we understand the Guaido team's argument, it is that the government should at least temporarily be excused from paying because its responsible officials—as conclusively recognized by the U.S. government—are in exile and are unable to control the government or its resources. The argument is clever. Arguably, the current situation has resulted from events that were unforeseeable and that resulted from foreign policy decisions made by the Trump administration that were not caused by the (rightful) Venezuelan government. And the argument has a certain equitable appeal. Why not give the government a break until its rightful leaders, as determined by the U.S. government, are in control?

The argument is not that Venezuela can't pay its debts, which is very true (it is out of money and in a humanitarian crisis, and no one thinks it will ultimately pay its debts in full) but not much of a legal defense. The argument is that Venezuela-2  can't pay its debts, because Venezuela happens to be controlled by Venezuela-1. And Venezuela-2 is the one defending the lawsuits. Effectively the argument is: For reasons beyond our control, we have temporarily misplaced our country, so you can't sue us to pay back your bonds until we get it back.

That seems like kind of a hard argument to win, but you don't necessarily have to  win:  Just slowing down the lawsuits to argue over this point has some benefits to Guaidó's interim government. And as Weidemaier and Gulati point out , the argument  did  have that effect; the U.S. judge gave the parties more time to argue about this, effectively pushing any decision back “until mid-April 2020, or perhaps even longer.” By then I suppose there is some hope that Venezuela-1 and Venezuela-2 will have merged (by Guaidó taking power, or by the U.S. recognizing Maduro, or by some compromise or other result) and it will all be a bit more orderly.

This is only the half of it, by the way! I was oversimplifying when I said that Maduro's government controls Venezuela's oil and money and productive capacity. In fact, some of Venezuela's money is held abroad, and, as the internationally recognized government, Guaidó's interim government might be able to gain control that money . And a relevant part of Venezuela's economy actually exists in the U.S.: It is Citgo , which has declared its independence from Maduro and effectively answers to Guaidó. Technically Citgo is a subsidiary of PDVSA, the state oil company, and it answers to PdVSA. But it answers to PDVSA-2, a PDVSA-in-exile whose board is appointed by Guaidó, not PDVSA-1, the PDVSA-in-situ that actually controls Venezuela's oil and answers to Maduro. 

And in fact PDVSA-2, Guaidó's PdVSA, the one that  doesn't  control PDVSA's oil and operations but that  does  control Citgo,  has made a payment to bondholders . Here, from mid-May :

Venezuela's ad-hoc board of directors for state oil company PDVSA, appointed by opposition leader Juan Guaido, said on Thursday it has made an interest payment on its bond maturing in 2020, delaying uncertainty over its crown jewel U.S. asset.

The PDVSA bond is backed by shares in U.S. refiner Citgo and failure to make the $71 million interest payment would have allowed bondholders to seize the shares as compensation. ….

President Nicolas Maduro's government had remained current on the 2020 bond even as it fell behind on more than $10 billion in interest and principal payments on other bonds issued by PDVSA and the government.

But efforts by any Maduro-linked entity to pay would have been complicated by sanctions imposed by the United States on PDVSA in January as part of a bid to pressure Maduro to step down. … PDVSA's ad-hoc board has said it will use uncollected oil revenue from PDVSA to make the bond payment but has not provided further specifics about the source of the funds.

The bondholders who are suing argue that this is a reason to reject the impossibility defense: “Venezuela's impossibility defense is refuted by the fact that the Guaidó government made a $71 million interest payment to other bondholders less than a month ago,” they write . If Venezuela-2 controls Venezuela's money, then maybe it should pay the bonds, or at least be declared in default.

Away from these philosophical issues about who is in charge, the interim government and a committee of bondholders have both released proposals for how to restructure Venezuela's debts. (Here are Weidemaier and Gulati on the government's proposal, and Ricardo Hausmann et al. on “How to Address Venezuela's Crushing Debt Burden.”) These proposals are pretty general at this point, and I suppose there is not much sense in the two sides sitting down to iron out the details, since the interim government doesn't control Venezuela and there's no guarantee that whatever they agree to can actually happen. But an important plank of the interim government's proposal is that it would give equal treatment to creditors who have and have not gotten U.S. court judgments against Venezuela; the point is to deter creditors from  seeking judgments :

“We cannot allow special treatment because if we do, we are creating an incentive for litigation,” José Ignacio Hernandez, Mr Guaidó's attorney-general, said. “The message is, ‘please don't sue Venezuela, because it will be a waste of money'.”

The message here, as in the lawsuits, is basically that you have to wait to figure out who runs Venezuela before you can get your money back from Venezuela. Which seems reasonable enough, though it is hard to know how long it might take.


Matt Levine / Bloomberg / July 12, 2019

ISSUES.... 07 / 15 / 2019 - Send Us Your Issues

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