Venezuela, once the most prosperous country in South America, can no longer pay its debts.
After missing $200m of interest payments on two government bonds, the administration of President Nicolas Maduro was this week declared “in default” by ratings agency S&P.
Though bondholders are yet to follow suit, this could happen at any moment, potentially triggering a wave of cross-defaults on Venezuela’s foreign debt. Investors could soon be entitled to seize Venezuelan assets outside of its borders, such as oil cargos, to repay defaulted debt.
Although Venezuela has been in crisis for a number of years, it’s hard to overstate the severity of their present situation.
The regime had to this point managed to honour interest repayments to foreign investors by sacrificing imports of food, medicine, and basic goods. Given Venezuela’s complete dependence on imports for amenities, the decision to prioritise creditors over citizens has had severe humanitarian consequences.
Already, Venezuelans are waiting hours in line to buy food, and dying of preventable diseases due to medicine shortages. GDP has shrunk by a third since 2013. Any further deterioration of its economy could tip the country from crisis into catastrophe. But with creditors looming, the regime has had little choice but to divert its sovereign reserves abroad.
Venezuela’s leaders brought this economic demise on their own country. Since 1998, the government has nationalised over a thousand companies, destroying the productive structure of the economy to the point where crude oil is now their only meaningful export.
While global prices remained high, Venezuela was able to coast on the wave of its geographical fluke – rich oil reserves – to fund the generous welfare policies praised by left-wingers around the world.
Following the oil price slump, however, the impact of mass nationalisations, unsustainable borrowing, government corruption, and price controls became devastatingly clear.
Since then, Venezuela’s former acolytes, including Britain’s own Jeremy Corbyn, have remained tight-lipped about the present catastrophe and its causes.
Earlier this year, Corbyn finally broke a long period of silence to condemn violent clashes between authorities and opposition groups. But a vague critique of “violence on all sides” is a far cry from an honest admission of why Venezuela has failed – namely, socialism.
Without an acknowledgment of the government’s heinous mistakes, Venezuela cannot hope to recover from its latest crisis. Earlier in the week, Russia agreed to restructure $3.15bn in Venezuelan debt, providing a sliver of breathing space.
Yet this is small change within the overall debt burden – an estimated $140bn owed to creditors around the world.
The Maduro administration looks completely unprepared for the complex set of negotiations needed to agree a restructuring programme of this kind.
Leading their negotiating team is vice president Tareck El Aissami. Nicknamed the “Narco of Aragua” by his opponents, El Aissami is currently under individual sanction by the US for alleged drug-trafficking.
Venezuela’s economy minister, Simon Zerpa, is also sanctioned for alleged corruption. In practice, this means that American investment groups – the biggest holders of Venezuelan debt – can’t even sit down with negotiators while these officials remain in place.
This may help enable Maduro and his international supporters to blame the US for its predicament, along with fluctuating oil prices, but the truth is that the current situation stems from 20 years of disastrous chavista mismanagement.
Venezuela’s situation is tragic, but it is a classic example of the poverty and chaos that is the inevitable result of socialist ideology.