Skip to main content

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated Cookie policy, Privacy policy and Terms & Conditions

gulati1_FEDERICO PARRAAFPGetty Images_pplwalkingmoneysigns Federico Parra/AFP/Getty Images

Should Creditors Pay the Price for Dubious Bonds?

Venezuela’s latest expected debt default raises the question of whether creditors should bear the risk that unauthorized debts can be repudiated. In the final analysis, imposing some risk on careless creditors may be the best way to ensure that politicians honor the limits on their borrowing authority.

DURHAM/GENEVA/CHAPEL HILL – In late October, Venezuela is likely to default on a $913 million payment on a key bond. Because the country has already defaulted on most of its debt, one might be tempted to regard another missed payment as no big deal. But this bond, issued by the national oil company Petróleos de Venezuela, S.A. (PDVSA), and referred to as PDVSA 2020, is backed by juicy collateral: a controlling stake in Venezuela’s economic crown jewel, United States-based refiner CITGO.

Ordinarily, unpaid bondholders could tell the bond trustee to seize the collateral. But, given its dubious provenance, the PDVSA 2020 is no ordinary bond. It was issued in 2016, when PDVSA was close to default. To buy time, the company swapped short-maturity bonds for this longer-maturity one. In exchange, creditors received collateral in the form of a 50.1% interest in CITGO’s parent company.

The transaction was unusual in at least one respect. The Venezuelan Constitution requires the country’s National Assembly to approve contracts of national interest. But the opposition-controlled legislature did not approve this bond issue, which it undoubtedly viewed as an attempt by President Nicolás Maduro’s government to buy time for itself.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

https://prosyn.org/0FgpMWC;
  1. skidelsky147_Christoph Soederpicture alliance via Getty Images_policechristmasmarketgermany Christoph Soeder/picture alliance via Getty Images

    The Terrorism Paradox

    Robert Skidelsky

    As the number of deaths from terrorism in Western Europe declines, public alarm about terrorist attacks grows. But citizens should stay calm and not give governments the tools they increasingly demand to win the “battle” against terrorism, crime, or any other technically avoidable misfortune that life throws up.

    1