Thursday 6 February 2020

Is Venezuela about to get caught up in Trump's 'Fight Against Socialism' election campaign?

As a recap, I had previously speculated that a Maduro in power for the long haul would have to turn to the Chinese and Russians to make it work and would probably need to restructure the debt, into say a 'Dim sum bond' strip.

The bonds don't seem to have really moved since, the EMBI+ ETF has sold out of most of its sovereign exposure and has just $20m of market value left in mostly PDVSA bonds. Last April it had per its financial statements $639m in par, vs $248m par now, so a 61% reduction. They have also reduced the October 2019 holding by 44%. Given the remaining bonds only have a market value of $20m, most of the overhang from the EMBI+ ETF has gone. 

If we take that as a proxy for foreign institutional drip feed into the market, then most, but not all, of it has happened.

Long term I think the bonds are cheap, the issue is near term and intermediate term catalysts.

Longer term, as discussed in the prior article, Maduro staying in power, relaxing price controls, allowing some dollarisation, attracting some new investment, seeing some economic improvements and giving control of the oil fields to foreign oil companies is one possibility.

If PDVSA bring in foreign oil companies, then the bond holders can sue to intercept the royalty/ production sharing payments, if they don't restructure the bonds. So at some point it would be easier to restructure. Although it would be complicated and leave most US held bonds as defaulted holdouts unless sanctions were relaxed.

Then there is the short term. Are we at the bottom?

Trump's 'Fight Against Socialism' re-election campaign

We know Bernie Sanders is almost certainly going to win the Democrat nomination this time. He will be running on a 'progressive, socialist/ social democrat' campaign. 

Trump will run on a freedom, 'American values', capitalism, jobs and economy platform.

I saw this article today following Juan Guaido being praised by Trump in his State of the Union speech. Specifically:

"The senior administration official also described “good momentum” since Maduro’s party failed to wrest control of the national assembly from Guaido last month, and said there would be some “impactful measures” within the next 30 days to further cripple Maduro’s rule.

The only possible topic up for negotiation with Maduro’s government was a discussion of “certain guarantees” upon his exit, the person added." 

So question is what do they plan? They will likely to be fighting Bernie in the election campaign in Q2 and Q3. They could dovetail 'further actions' against Vene with a generalised 'Fighting Against Socialism and for American Values' campaign platform.

The main effective lever they have, but haven't pulled yet, would be to discretely coordinate army and police deserters in Colombia or Brazil and then support them to cross the border. So far neither Colombia or Brazil have supported this option. In my opinion that would lead to a relatively quick and, in the scheme of these things, peaceful transition to a democratic country that enters a recovery programme. Another option would be a military coup, but only the CIA would know how viable that is at the moment.

I'm not sure why Trump hasn't pulled this lever yet, apart him his general aversion to conflict, we know John Bolton and the CIA/ Military have offered such options already.

Trump, with respect to dealing with Iran, only signed off on kinetic action, and that was only one targetted strike against Qassem Soleimani, after Iran killed US personnel and Soleimani was planning more attacks. Maduro hasnt killed or to my knowledge threatened any US citizens. So perhaps Trump's hurdle for authorising direct intervention is much higher than where the current situation is.

I think if the US policy starts to become interventionist, then you see the final leg down to 5,6,7c or so, but as the conflict is short lived and people start to see a positive outcome the bonds will be back in the 20s as the path forwards is cleared up.

Clearly I would personally support this democratic outcome, but the reality is, unless an action like this is taken, I don't see Maduro leaving voluntarily. Further US based administrative controls wont make much of a difference, particularly if the economy starts to recover after dollarisation and regulations being lifted.

The country is only about 30m people, with the oil wealth and a basically sensible socialist/ nationalist government, it should be a growing country. If Maduro manages to engineer a recovery, you never know, perhaps he could even win another election.

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