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Why it’s time to lift the Venezuelan debt trading ban
Dr. Thomas Laryea is an expert in international law and policy at Orrick, Herrington & Sutcliffe. He specializes in advising governments and creditors on international finance. This post argues for over-reliance on sanctions, especially the ban on secondary trading of Venezuelan bonds, for a comprehensive debt restructuring.
The Biden administration has the opportunity to rebuild its ties with Venezuela and lay the foundation for the restructuring of Venezuela’s more than $ 150 billion in public external debt. For more than 15 years, the United States has imposed numerous economic sanctions on Latin American countries, followed by others. The use of sanctions culminated under the Trump administration and was ostensibly deployed for a wide range of policy objectives, including the change of government. Few policy makers can claim that these sanctions have achieved their stated objectives.
The ban on certain transactions of Venezuelan bonds stands out as one of the most unique and ineffective sanctions. It began in August 2017 with a ban on Americans participating in the issuance of new non-short-term debt by Venezuela, and a ban on the purchase of assets by Americans or in the United States on the secondary market. At the same time, US authorities have issued a license to exempt most Venezuelan Eurobonds (excluding bonds held by the Republic itself). Then, in January 2019, U.S. authorities lifted the exemption on bonds issued by the state-owned oil company Petroleos de Venezuela (PDVSA) and banned them from trading, but exempted certain other bonds issued by the Republic. I kept it. ..
It was a head scratcher. It is understandable that Americans are prohibited from directly funding the Venezuelan government. But a ban on secondary market transactions? Not so much. And given the ban on US jurisdiction, why would you try to impose it when others in the global bond market are unaffected? And why ban PDVSA bonds to launch, but not republican bonds?
Some speculate that the goal is to lower the price of PDVSA bonds in order to induce future debt restructuring. But why does the U.S. government use sanctions to distinguish PDVSA from Republic bonds in this way, affecting the fairness between creditors in future sovereign debt restructuring that U.S. sanctions have already eliminated? Is it? A few weeks after many market turmoil, the distinction between PDVSA and Republic bonds disappeared, effectively banning both.
The obvious reason for the ban was that it prevented the Maduro administration-related entities from profiting through the secondary market. But if so, why not deal with it in a way that suits Americans by adding these individuals to the list of specially designated citizens who are banned from financial transactions? There was no good answer.
Suspicious precedent
In addition to continuing to disobey rational explanations, the liquidity ban sets a questionable precedent in terms of US financial market regulation. The risk of replicating a Venezuelan ban in other sovereign debt situations needs to be internalized in future markets and may drive some legitimate activities outside the United States.
Some market participants are trying to mitigate such risk by proposing provisions in government bond documents that allow for accelerated payment terms in situations where similar secondary trade bans are imposed. Such risk mitigation tools are in the “laboratory” stage, and their potential effectiveness depends on the particular circumstances of each case.
Meanwhile, the cost of a trade ban in the Venezuelan situation has been absorbed by the debtor, not by the Maduro administration. Republic and PDVSA bonds are down 80% compared to prices already suffering when the trade ban was imposed. Bond price crashes can be due to a variety of factors, but the impact of the traditional US ban on most of these bond transactions was certainly a factor.
The Biden administration has already begun to rethink some of the sanctions against Venezuela, and it is clear that the measures are having a negative impact. In particular, sanctions that impede the operation of ports and airports have been relaxed, and sanctions that impede the response to the COVID pandemic are being reconsidered. This development is sound in recognizing the humanitarian needs of the Venezuelan people. Similarly, it should be recognized that the impact of balkanization on global capital markets is also unsustainable.
Removing the trade ban does not address all the problems associated with solving Venezuela’s debt problems, which are deeply flowing from chronic economic and institutional failures. However, lifting the ban sends a signal of willingness to correct missteps and a commitment to work towards potential solutions that take advantage of the market rather than interfere with it.
In a previous post FT Alpha Building, I said that the possibility of debt restructuring in Venezuela requires coordinated international efforts. I have proposed a way to promote a comprehensive restructuring of Venezuela’s debt by establishing an international trust under the IMF’s legal framework. It is time to consider such progressive ideas and set aside regressive measures such as trade bans.
Why it’s time to lift the Venezuelan debt trading ban
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