Venezuela bond holders are right to get excited over the removal of president Nicolas Maduro from power. A debt restructuring was next to impossible with him in charge. But the scale of this week’s rally does not reflect the reality that getting some money back from the country is a long, long way off.
It is nearly a decade since Venezuela defaulted and Maduro’s torrid relationship with the US — so bad that the latter launched a military operation to arrest him in his own country — plus US sanctions meant a restructuring of the country’s $23bn of Eurobonds was never going to happen with him in charge.
Venezuela Eurobonds have jumped 10 cash points this week. A restructuring is more likely now but the state of things on the ground in the country means one is still a pipedream for the near future, and will not happen for years.
First, very little has changed politically in Venezuela. Maduro may be gone, but his deputy has filled his place and his regime remains in place, in totality.
Second is that Venezuela will never be able to restart debt repayments to overseas bondholders without sorting out its oil industry. Production has slumped after years of corruption and negligence.
US president Donald Trump has said his country's oil majors will go in and get the wells pumping. But this will not be very appealing to those companies: it will take vast amounts of money to bring Venezuela’s oil sector back to life, money they will be reluctant to spend in a country with a history of nationalisation and poor relations with overseas businesses. Add in low oil prices which make the return on investment even less attractive, and Trump may not get his wish.
Investors are right to cheer Maduro’s removal, but the rally is overstated. We have seen this overoptimism in Ukraine bonds, where there have been repeated rallies on expectations of a peace deal which has never materialised, or even seemed that close.
It is years before Venezuela restructures, at best, and when it does the process will be extremely complex, given the country’s huge and opaque debt pile.
Venezuela's bondholders may be on the road back to par, or somewhere a bit nearer to it, but the route will be long and treacherous.