Goldman’s Venezuelan “Hunger Bonds” Deal Backfires

The $2.8 billion Venezuelan bond deal made by Goldman Sachs, which brought the bank harsh criticism from its peers and activists, is now making the Wall Street major a loss as the price of the bonds plunge.

Goldman bought the 2022-maturing bonds from the state-run PDVSA for 31 cents on the dollar earlier this year in what seemed like a bargain at the time. But Caracas’ opposition-controlled Congress condemned the purchase, dubbing the “hunger bonds” as a scheme to make a “quick buck off the suffering of the Venezuelan people.” 

But Goldman is finding that quick buck rather elusive, as the price of the bonds are now down to 25 cents on the dollar after President Nicolas Maduro announced a plan to restructure over $60 billion sovereign and PDVSA debt during an upcoming meeting in Caracas with existing creditors. This means that Goldman has lost at least $54 million on the deal—so far.

“The opposition has already said they won’t honor that bond, so you’re taking a big risk trading those,” Russ Dallen of Caracas Capital told the Financial Times.

By the end of next year, the government and state-owned PDVSA must repay debt obligations to the tune of $13 billion, and foreign currency reserves are less than that already, at $10 billion. The country is also subject to economic sanctions from the United States, which prohibit any U.S. entities from taking part in any business dealings with Venezuela, including lending Venezuela a helping hand through debt restructuring.

As Bloomberg author Katia Porzecanski wrote in a recent overview of the Venezuela situation, a lack of access to U.S.-based banks and investment companies will make the debt restructuring initiative very difficult if not impossible, as debt restructuring almost invariably involves new debt issuance. Imports are at multi-year lows and the population is suffering from shortages in basic goods including food and medicine.

By Zainab Calcuttawala for Oilprice.com

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