When he finally leaves the political stage in Venezuela, Nicolás Maduro will leave behind a grim legacy of oppression, suffering, and economic devastation. He will also leave a mountain of foreign-currency-denominated claims against the Venezuelan public sector – almost all of which is now in default – totaling over $150 billion. It will fall to Venezuela’s interim government to move promptly to arrest the deep humanitarian crisis, restore the country’s shattered economy, and deal with these gargantuan legacy debts. All three efforts must be attempted simultaneously. None will be easy.
To provide guidance about what to expect when the debt-restructuring process begins, the National Assembly and the interim government released a white paper describing the broad policies that the interim government expects to follow as it tackles the debt. Of course, no restructuring of these claims can begin until the interim government assumes control of the state machinery in Venezuela and the international economic sanctions that have been imposed on the Maduro regime are lifted. When that day arrives, four main principles will guide the settlement of legacy commercial claims.
First, the settlement should be as comprehensive as possible. Maduro and his predecessor, Hugo Chávez, managed to incur liabilities to an astonishingly diverse group of creditors: banks, bondholders, unpaid suppliers, arbitration award holders, expropriated investors, and various others. Unlike most of the sovereign debt workouts over the last 40 years, this will not be a restructuring of exclusively bond indebtedness or commercial bank loans. All legacy commercial claims, whatever their origin, will need to be addressed as part of Venezuela’s economic recovery program.
Second, only reconciled claims will be eligible to participate in the debt restructuring. Many of the liabilities incurred by the regime will be relatively easy to verify and quantify. The circumstances surrounding the incurrence of other liabilities, however, are opaque; in this context, opacity arouses suspicion. The interim government expects to appoint a claims reconciliation agent whose task will be to weed out corrupt, fraudulent, or inflated claims against Venezuelan public-sector entities before the debt restructuring begins. The Venezuelan people, multilateral supporters of Venezuela’s economic recovery, and Venezuela’s other commercial creditors will all insist that this culling process be carried out efficiently and transparently.
Third, once claims have been reconciled and quantified for the purposes of the restructuring, those making claims will be eligible to participate in the debt restructuring on equal terms with all other reconciled claims. With very limited exceptions, no special treatment will be accorded to claims based on their provenance (bond, loan, unpaid invoice, damages for an expropriation, and so on), the domicile or character of the holder (institutional or retail creditors), the identity of the original public-sector obligor, whether the claim had previously been reduced by a judicial decision, or otherwise.
In any exercise of this kind, preferential treatment given to one category of claimant necessarily results in a proportional disadvantage to all the other claimants. The inter-creditor rivalry and resentment engendered by such discrimination could be fatal to a comprehensive debt-restructuring program of the type that Venezuela must soon undertake.
Fourth, the interim government will need a program with the International Monetary Fund in order to access the financing from both official and private-sector sources that will be essential for Venezuela’s economic recovery. That program will include a projection by the IMF regarding the level of debt that the Venezuelan economy can reasonably be expected to carry over the medium term. It will be of vital importance that the eventual settlement of Chávez/Maduro-era claims be consistent with those projections and not jeopardize Venezuela’s compliance with its IMF program.
The objective of these four principles is to streamline a process that might otherwise be paralyzingly complicated, dangerously protracted, and deeply divisive. No one is naive enough to expect that the restructuring of the Chávez/Maduro-era debt will be easy or pleasant. The interim government is committed, however, to ensuring that it is fair and transparent.