11/16/2017 Venezuela Goes Bust - WSJ

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REVIEW & OUTLOOK

Venezuela Goes Bust

Another lesson in the price of lending to a socialist regime.

Venezuela's President Nicols Maduro in Caracas, Venezuela, Nov. 12. PHOTO: MIRAFLORES PALACE/HANDOUT VIA
REUTERS

By The Editorial Board

Updated Nov. 15, 2017 7:27 p.m. ET

Milton Friedman once joked that if you put the government in charge of the Sahara
Desert in five years there would be a shortage of sand. He could have been talking about
Venezuela and its oil wealth. But it is no joke.

On Monday Caracas missed interest payments due on two government bonds and one
bond issued by the state-owned oil monopoly known by its Spanish initials PdVSA.
Venezuela owed creditors $280 million, which it couldnt manage even after a 30-day
grace period.

Venezuela is broke, which takes some doing. For much of the second half of the 20th
century, a gusher of oil exports made dollars abundant in Venezuela and the country
imported the finest of everything. There were rough patches in the 1980s and 1990s, but
by 2001 Venezuela was the richest country in South America.

Then in 2005 the socialist Hugo Chvez declared that the central bank had excessive
reserves. He mandated that the executive take the excess from the bank without
compensation. Today the central bank has at best $1 billion in reserves.

Falling oil prices are partly to blame, but the main problem is that chavismo has
strangled entrepreneurship. Faced with expropriation, hyperinflation, price controls
and rampant corruption, human and monetary capital has fled Venezuela.

As of Tuesday evening, the International Swaps and Derivatives Association still had not
declared Venezuela in default. That matters because this will trigger the insurance
obligations inherent in the credit default swaps. But S&P Global Ratings declared the
country in default Monday. On Tuesday morning the Luxembourg Stock Exchange
issued a suspension notice for the bonds with missed payments.

President Nicols Maduro has formed a commission to restructure up to $150 billion of

the debt and put Vice President Tareck El Aissami who is under U.S. sanctions for drug
traffickingin charge. Mr. El Aissami called a meeting of creditors on Monday in
Caracas, which most bondholders did not attend. Press reports said Mr. El Aissami
delivered a monologue on Venezuelas intention to pay and took no questions. He argued

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11/16/2017 Venezuela Goes Bust - WSJ
that Trump Administration sanctions make it difficult for the dictatorship to arrange
refinancing.

The real problem is that restructuring assumes the country can grow again. Thats
nearly impossible without a change in policy that will free the economy.

If Caracas doesnt find a way to settle with bondholders, they will soon ask authorities to
seize Venezuelan assets such as oil shipments at sea and Citgo facilities in the U.S. Such
are the wages of socialism.

Correction: An earlier version misidentified the name of the International Swaps and
Derivatives Association.

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