Venezuela Federico Parra/Stringer

Restructuring Debt in the Dark

Unlike chess or football, international financing of sovereigns is a game played with ever-changing rules. And, following the success of Argentina's holdout creditors in that country's debt restructuring, other distressed sovereigns face a changed playing field – as Venezuela is likely to be the first to find out.

CAMBRIDGE – As the Annual Meetings of the International Monetary Fund and the World Bank begin in Washington, DC, one member country is conspicuously absent: Venezuela. Yet there is much to be discussed about the country’s finances. Indeed, a sovereign-debt crisis is inevitable.

All major sovereign-debt crises of the past – including in Mexico and Greece – have generated changes in the rules, jurisprudence, or strategies adopted by debtors, creditors, and international financial institutions. Most recently, Argentina’s 15-year legal battle with its creditors – in which holdouts did measurably better than creditors who had years earlier accepted a debt exchange – destabilized the international financial architecture and generated a new set of rules. Venezuela will be the first country to navigate the new rules; the country can ill afford to get it wrong.

Venezuela is in a severe crisis of its own making. The government used the period of high oil prices from 2004 to 2013 to quintuple its external debt, expropriate significant chunks of the economy, and impose draconian price, labor, and currency controls. As the price of oil collapsed in 2014, the government, having lost access to capital markets because of its profligacy, chose to continue servicing its bonded debt and default on its obligations to importers and most non-financial creditors.