(Bloomberg, 27.Oct.2020) — The Guaido administration’s loss in a lawsuit over Citgo’s assets shows the folly of dragging international investors into the highly polarized conflict of Venezuelan politics.
On October 16, Judge Katherine Polk Failla of the Southern District of New York dismissed an attempt by the administration of Juan Guaido, whom the U.S. and 57 other nations recognize as Venezuela’s legitimate leader, to invalidate $1.7 billion in bonds due in 2020 that had been issued in 2016 by Venezuela’s state-owned oil company PDVSA.
The decision has stoked fears that the country may be about to lose Citgo, the U.S. refiner owned by Venezuela’s national oil company, whose shares were used to back the obligation. That outcome is unlikely. Current U.S. sanctions bar the seizure of Venezuelan assets; even if the U.S. Treasury takes the decision to allow it, a negotiated solution between creditors and Venezuela’s interim government to refinance what the country cannot pay at present is within reach.
More troubling than the improbable outcome of a Citgo seizure, however, is the misguided decision by the Guaido administration to drag international investors into the highly polarized conflict of Venezuelan politics. Not only was this lawsuit ill advised. It also reflects the Guaido team’s self-destructive tendency to regard any group that does not wholeheartedly back its strategy — in this case, a group of bondholders that includes some of the world’s most important investment funds — as an enemy, and helps to explain why its international support and chances for taking power are dwindling.
Judge Failla’s decision affirms a basic principle essential for the functioning of international credit markets: Governments cannot be allowed to annul debts retroactively. Sovereign governments from across the world converge in New York financial markets and issue securities bound by that jurisdiction’s laws precisely because they trust the enforcement of property rights. If a government’s sole claim that a past obligation is invalid was enough to annul past debts, sovereign debt markets would come to a standstill, with disastrous consequences for developing countries that rely on them to meet their financing needs.
Yet what was perhaps most striking was the court’s dismissal of the Guaido administration’s claim that Venezuela’s National Assembly had invalidated the bonds by denying authorization for their issuance in 2016. “Plaintiffs’ argument does not hold up under close inspection…because it lacks support in the plain language of the Resolutions,” wrote Judge Failla. Nor did the court pay credence to the Guaido team’s claim that some of the world’s largest asset management firms had connived with the Maduro regime to issue fraudulent debt. If the National Assembly had tried to invalidate the bonds at the time of their issuance, then the court would have accorded it the deference usually given to acts of a foreign sovereign and could perhaps have found the bonds invalid. But the court found instead that the claim that the legislature had tried to invalidate the obligation in 2016 was not truthful.
To understand why the National Assembly shied away from invalidation at the time of issuance, consider what was happening in Venezuela in 2016. The opposition had just won a two-thirds majority in the National Assembly and was pushing for a recall referendum that, had it been held, would have almost surely led to Maduro’s dismissal. Markets were excited at the prospects for political change in Venezuela; the opposition did not want to antagonize them by blocking an operation and precipitating a default on the nation’s debts. Therefore, when the operation came up for discussion, legislators opted to express their disagreement with the use of Citgo shares as collateral but stopped short of questioning the legal validity of doing so.
Why, then, did the Guaido team try to claim that the legislature did something which it didn’t do? The answer lies in the dynamics of policy decisions within the Guaido administration. Guaido’s policy team is led by academics who have a fundamentally hostile view of international financial markets. This group is distinct from — and in fact at odds with — many of the legislators who chose not to contest the bond’s validity in 2016. The group believes that international investors have propped up the Maduro regime and should be punished for doing so. They also claim that all elections held in Venezuela over the past two decades have been fraudulent, and that anyone who has invested in the country since Chavez rose to power has helped to prop up a dictatorship.
These claims are highly problematic. International observers were present at most Venezuelan elections up to 2015 and found no evidence of fraud. Hugo Chavez was highly popular through his 14 years in power (in fact, he still is) and had an easy time winning re-election several times. The reality is that Venezuela’s tragic slide into full-blown authoritarianism is relatively recent. Up until a few years ago, Venezuela was a poorly run country, but it was not a dictatorship.
Ninety-seven percent of Venezuela’s debt in bonds now held by international investors was issued on or before 2014, when there was no question about the democratic legitimacy of the country’s governments. Some of it was even issued before Chavez came to power in 1999. And, although it is true that the governments in question ran the country very poorly, it is also true that many of the investors who acquired that debt were betting on the opposition to come to power and fix the economy.
Yet anti-Wall Street sentiment runs high among hardline groups of the country’s embattled opposition. In their view, whoever is not on the opposition’s side is an ally of Maduro. The climate is so heated that Judge Failla found it necessary to issue an order shielding the identity of one of the defendants’ expert witnesses after Guaido officials threatened anyone who testified in favor of bondholders.
In that sense, the Guaido administration’s attitude toward international markets resembles its attitude toward other political actors, such as the country’s military, its private sector, moderate opposition parties or center-left political movements outside of Venezuela. By pigeonholing everyone who does not unquestioningly agree with its strategy as a collaborationist, Venezuela’s opposition has alienated many potential allies. Hence its support and chances for taking power are shrinking.
When Venezuela recovers its democracy, the success of a daunting economic reconstruction effort will depend on access to multilateral support, capital markets and private investment. They should be viewed and treated as allies, not adversaries, in the rebuilding of what was once one of Latin America’s wealthiest and most well-developed countries.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.