As Venezuela's political saga intensifies, bullish investors, primarily, but not solely, Goldman Sachs, have thrown out any shred of moral implications out the window in a gleeful rout to snap up distressed Venezuelan bonds.
The bank's asset-management arm paid a cool $865 million for bonds issued by Petroleos de Venezuela SA, Venezuela's national oil company, in a controversial transaction in May, at 31 cents on the dollar, i.e. at a near 70 percent markdown. In 2022, when the bonds mature, Goldman's fund will be entitled to $2.8 billion. In the interim, it gets 19 percent annual interest -- a hefty $756 million. Japanese investment bank Nomura Securities has also shrugged off any moral implications and eagerly purchased about $100 million worth of these bonds for a mere $30 million.
The leader of Venezuela's National Assembly, Julio Borges, has condemned these deals, saying they are affording a lifeline to an authoritarian regime selling off national assets at miserably low prices. He has vowed to ignore the debt if the opposition comes to power. Rebuffing any moral culpability, Goldman Sachs said it didn't provide cash directly to the government because "the bonds were purchased from a broker and did not interact with the Venezuelan government."
With depressed crude prices and Venezuela depending on oil revenue for 95 percent of its foreign-currency earnings, cash-strapped President Nicolas Maduro has been facing a tough decision: preserve steady imports of food or maintain payments on overseas notes. With alarmingly low foreign reserves, funds meant to weather tough economic conditions, now under $10 billion for the first time since 1995, Maduro has opted for the latter, and faithfully kept up with bond payments. In the meantime, he has slashed imports of food, medicine, and other basic goods. His adversaries insist he's chosen his political survival over his constituents' needs, and have coined a term for government debt under his rule: "hunger bonds."
Venezuela's Living Conditions Survey ENCOVI recently showed that 75 per cent of the country's population, on average, lost 19 pounds last year due to food shortages. The study also concluded that 93 percent of Venezuelans do not have sufficient money to cover their food expenses. Violent protests and rampant food scarcities have brought soldiers into the streets and forced residents to hoard food and water.
Despite boasting the largest oil reserves in the world, a miasma of mismanagement and corruption have impoverished Venezuela, as it faces foreign debt payments totaling $4.8 billion for the rest of the year. Of that, $1.6 billion is due in October and another $1.9 billion in November.
Despite its economic and political woes, Venezuela remains a key member of several prominent bond benchmarks tracked by institutional investors. For example, the returns of the JP Morgan Emerging Market Bond Index (EMBI+) are exceptionally influenced by Venezuela's havoc. Why? Because, while Venezuela represents only about 5 percent of the index, it comprises around 20 percent of its yield. The yield on Venezuelan debt is about five times higher than that of other countries in the index, a reflection of the massive risk premium that Venezuela is grappling with.
Furthermore, the price volatility of Venezuelan debt is actually the highest in the EMBI+ and makes up an inordinate piece of the index's daily price fluctuations. Holding the bonds risks encouraging investors to root for payments to be made even as the nation crumbles, Harvard University professor Ricardo Hausmann argues. In the event of a default, bondholders will be demanding to snatch Venezuelan assets for payment.
Oppressive regimes have learned to bank on the greed of the global investment system. By taking advantage of certain attractive financial opportunities, international banks increase their profit margins while simultaneously fomenting national austerity in order to provide bond payments at the cost of hungry citizens. Goldman Sachs, along with any other PDVSA bond holder, is now left in the tainted position of hoping Maduro will remain in power so they can receive their bond payments.
Itziar Aguirre is a freelance writer and a Research Analyst at HFF, a commercial real estate intermediary.
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