Here's What Could Happen to Venezuela's Messy $170 Billion of Debt
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
This episode of the Odd Lots podcast explores the complex world of Venezuelan sovereign debt restructuring with legendary debt lawyer Lee Buchheit. (02:00) The discussion centers on Venezuela's approximately $170 billion debt pile, much of which has been in default since 2017 following U.S. sanctions. With recent political changes in Venezuela, investors are betting on potential debt restructuring, causing defaulted Venezuelan bonds to rally from 5 cents to over 30 cents on the dollar. (08:00) Buchheit, who has worked on over two dozen sovereign debt restructurings including Iraq and Greece, explains the unique challenges of restructuring debt issued by what many consider an authoritarian regime. The conversation touches on the controversial "odious debt" doctrine, drawing parallels to the Iraq restructuring, and examines how geopolitical factors and Trump administration policies might influence any future Venezuelan debt workout.
- Main theme: The complexities and challenges of restructuring Venezuelan sovereign debt in the context of regime change and international sanctions
Speakers
Lee Buchheit
Lee Buchheit is a retired lawyer with a distinguished 40-year career specializing in sovereign debt restructuring. He has worked on more than two dozen sovereign debt restructurings, including high-profile cases such as Iraq and Greece. Buchheit is considered one of the world's leading experts on sovereign debt law and has been instrumental in developing many of the practices and precedents that govern modern sovereign debt workouts.
Tracy Allaway
Tracy Allaway is co-host of the Odd Lots podcast at Bloomberg. She covers financial markets with a particular focus on debt markets and bond trading, bringing expertise in understanding the narratives and stories embedded within financial instruments.
Joe Wiesenthal
Joe Wiesenthal is co-host of the Odd Lots podcast and a Bloomberg editor. He approaches financial topics from a broader economic and political perspective, often questioning conventional wisdom about debt obligations and creditor rights.
Key Takeaways
Sovereign Debt Restructuring is Fundamentally Different from Corporate Bankruptcy
Unlike corporate bankruptcies where courts can replace management and liquidate assets, sovereign debt restructurings must rely on consensual negotiations because "sovereigns are sovereign." (34:08) Buchheit emphasized that you cannot have a court tell a foreign sovereign "we're going to replace the management" or liquidate a country. This fundamental difference means that sovereign debt workouts have historically been characterized by holdout creditors who refuse to participate in voluntary restructurings and instead pursue legal remedies. The lack of an institutionalized bankruptcy regime for sovereigns creates unique challenges that require creative solutions and diplomatic negotiations rather than legal enforcement mechanisms.
The "Odious Debt" Doctrine is Problematic Despite Emotional Appeal
While it may seem morally justified to refuse payment of debts incurred by dictatorial regimes, the odious debt doctrine is "sufficiently gauzy" and dangerous to implement broadly. (10:08) Buchheit explained that once you start down the path of determining which regimes are "odious," you face impossible questions about what constitutes an odious regime. The doctrine requires proving that proceeds weren't used for citizens' benefit and that creditors knew the dictator would steal the money. As Buchheit noted, "pretty hard to find a regime that would, to everyone's satisfaction, be regarded as virtuous," making this principle too subjective and potentially destabilizing for international finance.
Political Will and Geopolitical Interests Drive Debt Restructuring Outcomes
The Iraq debt restructuring achieved an extraordinary 80% write-off not because of legal principles, but because the Bush administration was determined to make Iraq succeed as a democratic ally in the Middle East. (15:36) Buchheit revealed that Bush's team "really wanted that experiment to succeed" and viewed Saddam's debt as a major obstacle to Iraq's economic recovery. The U.S. had minimal exposure to Iraqi debt, making it "relatively harmless" for America to push for massive creditor haircuts. This contrasts sharply with Venezuela, where Trump's focus appears to be on oil companies and U.S. government recompense rather than Venezuelan democracy, suggesting very different restructuring dynamics.
Sanctions Create Legal Barriers That Must Be Removed Before Restructuring
Venezuelan debt restructuring has been impossible since 2017 not due to unwillingness to negotiate, but because U.S. sanctions make it illegal to even discuss restructuring terms. (23:11) Any attempt to negotiate would violate sanctions, creating a catch-22 situation. Buchheit explained that sanctions would need to be relaxed before any restructuring could begin, and this decision "ultimately sits with Mr. Trump." The removal of Maduro alone may not be sufficient - Trump has indicated he wants a "complacent regime" in Caracas that follows his orders before considering sanctions relief.
Oil-Linked Value Recovery Instruments Offer Creative Restructuring Solutions
Given Venezuela's dependence on oil revenues (95% of foreign currency earnings), bondholders will likely demand oil-linked value recovery instruments rather than traditional cash payments. (29:55) Buchheit explained this approach was used successfully in 1990s Brady Plan restructurings, where oil exporters like Mexico and Venezuela issued oil warrants that paid off when oil exceeded certain strike prices. With Venezuela's oil infrastructure requiring 2-5 years and significant investment to rebuild, and with oil companies getting "first dibs" on revenues, this type of commodity-linked instrument provides a logical way to defer most payments while giving creditors upside exposure to Venezuela's primary revenue source.
Statistics & Facts
- Venezuela's total debt stock is estimated at between $150-170 billion, with roughly half being Republic of Venezuela bonds and half being PDVSA (state oil company) bonds. (04:47) This massive debt pile went into default in 2017 following U.S. sanctions and has remained in default since then.
- Venezuelan bonds have rallied dramatically from trading at 5-9 cents on the dollar in recent years to over 30 cents on the dollar following recent political developments. (03:37) This represents significant gains for distressed debt investors who purchased the bonds at deeply discounted prices.
- In the Iraq debt restructuring, an extraordinary 80% of the debt was written off, which Buchheit described as "absolutely extraordinary for a middle income country that sits on the fourth largest oil reserves in the world." (18:20) This precedent was driven by strong U.S. political support for Iraq's reconstruction rather than legal principles.
