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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Pity the people of Venezuela. For almost 30 years they have struggled with horrifying misrule under former leaders Hugo Chávez and Nicolás Maduro. Then in January President Donald Trump unleashed a military attack to remove Maduro but left his deputy Delcy Rodríguez in charge.
Now they have been hit by two earthquakes, causing at least 235 deaths, leaving thousands injured and inflicting damage that will be made worse by the country’s economic plight.
As Venezuela deals with this devastating new catastrophe, it is also having to grapple with the thorny question of sovereign debt. This week it was revealed that the country’s total debt pile is around $240bn — much bigger than previously believed.
That is daunting given its economy has experienced “the deepest drop in GDP per capita seen anywhere in the world since 2013”, according to the Atlantic Council. However, last month Rodríguez promised to restructure the debt by the end of the year using Centerview, a New York-based advisory firm.
The fate of this deal matters enormously — not just to Venezuela but to the wider world. For after Trump’s unilateral (not to say imperialist) move on Caracas, the key question now is whether a similar approach will play out around the debt.
By any standards, Rodríguez’s recent announcement was unusual. One reason is that the Centerview mandate was reportedly enabled by a Trump acolyte. Another is that restructurings normally take years, not months, because of hedge fund lawsuits and China’s reluctance to forgive debts (it has been the biggest lender to low-income countries in recent years).
However, the biggest surprise is the process. Normally this starts with an economic assessment and policy programme from the IMF, followed by negotiations with official creditors. However, Venezuela wants a quick deal with bondholders first, without formal IMF co-ordination, and then a deal around commercial and official debt.
Unsurprisingly, some observers hate this. “Venezuelan authorities may be prioritising market investors over the welfare of their citizens,” complains Alejandro Werner of the Peterson Institute for International Economics.
Meanwhile, Brad Setser, an economist at the Council on Foreign Relations, admits that “a restructuring process without the IMF makes me very nervous”. He thinks it is crucial to have a neutral analysis of Venezuela’s external and internal debt to ensure that a deal will not just deliver short-term relief but be sustainable in the long run too.
However, those backing the idea of a quick deal insist they must buck this precedent. That is partly due to the complexity of the debt, which includes around $60bn of outstanding bonds from the government and PDVSA, the state-owned oil company (plus $40bn in interest); $20bn and $6bn in Chinese and Russian loans respectively; and vast historic claims from oil companies, trade creditors and other companies whose assets were expropriated.
Supporters of rapid restructuring also insist it is needed to kick-start growth and argue that existing IMF debt mechanisms simply can’t do that. This is despite recent reforms, under pressure from entities like the Group of Thirty, to create a so-called Common Framework, which tries to bring China and hedge funds into the negotiating fold with more transparency.
This new approach has delivered some results. But the process is still achingly slow, as shown in the IMF’s own guidance notes. Indeed the Paris Club of creditor nations warned this week that “the Common Framework must deliver faster”.
So can Centerview do any better? Possibly — if it can cut a deal with big bondholders (whom it already knows well), it might then force other creditors to get engaged. And while the IMF is not officially involved now, it may be pulled in later. But one unknown is what China will do. That matters since its loans are reportedly backed by oil revenues (now claimed by Trump). It is also uncertain whether non-US commercial lenders will play ball.
Some bond investors might fight a quick deal too. Hedge funds have gobbled up Venezuelan debt this year amid hopes that rising oil revenues and an IMF deal will raise recovery rates in future years. They may not agree to a restructuring based on today’s disastrous economy and the newly expanded estimate of debt.
So there is every reason to be cynical about whether the deal will fly. If Centerview can truly restructure the debt against the odds, it will deserve a big cheer but if — and only if — any deal also respects the rule of law and all creditor rights. Sweetheart treatment for US creditors would be entirely wrong.
So pay attention to that $240bn debt pile. This could turn out to be a key litmus test for both Venezuela, as it contends with the aftermath of the earthquakes, and also for Trump’s ability to bend the world to his will. We have already seen the impact of US unilateralism on trade and geopolitics. Now we may learn how far it can infect capital markets too.
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