Venezuela Debt continued from page 57
VRIs, however, have generated serious disputes over whether benchmarks have been met and how payouts under these instruments should be calculated. Successful implementation of oil‐linked warrants in a Venezuelan restructuring would require several prerequisites, including credible data, transparent reporting, and clear calculation procedures
Q: Venezuela’ s debt restructuring is often compared to the Iraqi restructuring of the mid‐2000s. Is that a valid comparison?
A: The Iraqi restructuring offers useful points of comparison, but it should not be treated as a blueprint for Venezuela. While there are similarities between the two situations, the differences may ultimately prove more significant.
Both Iraq and Venezuela are oil‐producing, middle‐income economies that experienced profound economic collapse, Iraq as the result of a war and Venezuela as the result of an economic crisis. In the Iraqi situation, the US government and its allies saw debt relief as part of a broader effort to stabilize Iraq’ s finances and support its recovery. In my view, Venezuela and the relevant stakeholders will also need to recognize the linkage between debt restructuring and economic reconstruction, and in Venezuela’ s case, these two processes should proceed
58
in parallel. As Iraq entered its restructuring in 2004, it faced significant uncertainty regarding the future price of oil, which would directly affect its projections regarding future total oil revenues. Venezuela faces similar uncertainties today.
Iraq had a creditor body that included thousands of commercial creditors, many of whom were believed to have weak documentation supporting their claims. In the Iraqi restructuring, the parties established a comprehensive debt reconciliation process overseen by a Big Four accounting firm. In light of questions about the validity and amount of certain categories of Venezuela’ s debt, Venezuela will likely need a similarly robust debt reconciliation process.
Yet there are major differences between the Iraqi and Venezuelan situations. In the first place, the Paris Club played a central role in Iraq’ s restructuring, enabling the US government under the George W. Bush administration to secure a Paris Club agreement that provided an incredibly steep haircut of approximately ninety percent on an NPV basis. The US then used the Paris Club deal as a template for negotiations with commercial and non‐Paris Club bilateral creditors, such as the major Gulf countries. By contrast, Venezuela’ s major bilateral creditors are China and Russia. China is not a Paris Club member, and Russia, although a Paris Club member, has previously managed its Venezuela claims through bilateral arrangements outside the Paris Club framework. As a result, a Paris Club‐driven strategy would not be a realistic option in a Venezuelan restructuring.
A second difference concerns a UN Security Council resolution adopted at the time of the Iraqi restructuring that protected Iraq’ s oil‐ and gas‐related assets and the revenues generated by oil and gas sales from creditor enforcement actions such as attachment. This deprived potential holdouts of meaningful leverage and in effect left them with few realistic options other than accepting a deal with deep haircuts that they otherwise might have rejected.
In view of heightened US tensions with China and Russia, those two countries, as Venezuela’ s largest bilateral creditors as well as permanent members of the Security Council, would almost certainly exercise their right to veto any comparable resolution designed to protect Venezuelan oil- and gas-related assets from creditor enforcement. That outcome would be even more likely if the resolution were proposed by the US.
58