Venezuelan Debt Crisis

September 29, 2018
debt-crisis

Venezuela, the Latin American country we know for its surplus inheritance of petroleum has been attracting media since the past decade for a few noxious reasons. Recently missing a significant payment of their bonds, Venezuela recorded new depths of economic crisis.

What Happened…

The oil-rich Venezuela has never been worried about growing other industries. Until the fall of the oil price in 2014, this policy served them well. They made dollars using oil and imported pretty much everything. Oil had a 95% share in Venezuelan revenue. When the oil price fell from $100 to $50 a barrel in the market, Venezuela fell short of foreign currency and importing goods faced a pause. As a result, hyperinflation spread across the country.

The situation in Venezuela got worse day by day, compounding oil crisis with lack of vision from the leaders. In the absence of any non-petroleum industry, the predicted inflation rate of 2018 is 1,000,000%. This high inflation rate meant freefall for the value of the Venezuelan money. It meant doubling in the price of all services and goods every 25 days.

Government reaction

Venezuela has been under a socialist government for the last 19 years. When the hyperinflation started, the government began to print more money and regularly hiked the minimum wages in an attempt to retrieve their popularity. The result was a 2.5 million bolivars bill for a coffee. With excess cash and no goods, inflation kept rising.

Recently, Venezuela has defaulted on $1.2 billion. Even though the value is small in a bond world, it is considered to be a sign of what’s to come. PDVZA, the petroleum company of the country has raised over $60 billion through bond sharing. The default in these debts can cause seizure of little revenue the government has now from oil. The fact that the bonds pay a 12.5% return has attracted many investors from Wall Street to make this risky transaction. As of now, in 2022 when these bonds mature, the government of Venezuela is not in a position to repay it. If you react to your obligations not being paid through legal channel, you will get a right to seize Venezuelan oil on the tanker in the ocean or US soil. Leading to complete prevention of oil transactions for the country.

Recent Actions…

One recent attempt done by the government to improve from the crisis was to introduce their cryptocurrency named Petro. In February 2018, the government of Venezuela developed it, and it is yet to start functioning as a currency. The US sanctions and plummeting Venezuelan Bolivar pushed the government for such an operation. In the first selling, nearly 100 million coins were made available worth $6 billion in total. According to the government, propped by the vast oil reserves and diamond deposition in the country Petro offers specific security for the buyers. The most recent act of making Petro second unit of currency in the country remains to show effects.

Anyway, the crisis is not going to end today or tomorrow. With 7% of Venezuelan people already migrated to nearby nations, the Venezuelan crisis remains to be stable.

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