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Venezuela-Foreign Debt

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Venezuela's public and private sectors owed as much as US$35 billion in debt in 1989, although data on debt varied considerably because of ongoing debt negotiations and reduction plans (see table 12, Appendix). The country ranked as Latin America's fourth leading debtor behind Brazil, Mexico, and Argentina; it was also one of the world's top twenty "highly indebted nations," as defined by the World Bank. Unlike many developing countries, Venezuela could not ascribe its huge indebtedness to the misfortunes of the oil price hikes of the 1970s. On the contrary, Venezuela benefited handsomely from the oil crises of the 1970s. Like several other oil economies, however, Venezuela squandered much of its newly found revenues through poor economic management, corruption, and over-ambitious development projects. Although oil financed economic improvements, the resulting public-sector indebtedness, which skyrocketed from under US$350 million in 1970 to US$10 billion by 1980 to US$25 billion in 1990, in no way compensated for the return on oil-based investments.

The country was atypical of other major debtor nations in other ways as well. Most notably, Venezuela actually paid both the interest and the principal of its debt during the 1980s, and its payments from 1983 to 1988 alone exceeded US$35 billion. These debt payments were pivotal in creating the large capital outflows that the nation suffered during the decade. Although the government temporarily held back debt payments in 1983 and again in 1988 because of ongoing negotiations, many in the international financial community still viewed Venezuela as a model debtor in many respects.

The structure of the country's debt was also distinct, as it was owed almost entirely to commercial banks rather than to multilateral institutions or bilateral agencies. In fact, Venezuela owed a higher percentage of its debt to commercial banks (at least 85 percent) than did any of the highly indebted countries. Another distinction was the large amount of private foreign debt. This private debt, estimated at US$4.5 billion in 1989, was declining under a set of agreements established in the early and mid-1980s. Finally, unlike most other debtors, Venezuela was also a major creditor to other developing countries (see Foreign Assistance , this ch.).

After securing debt rescheduling agreements in 1983, 1986, and 1987 to ease the terms of its repayments, Venezuela concentrated its debt management efforts in 1989 and 1990 on complex debt reduction plans with its more than 450 creditors. By early 1990, the banks, the government, and the government's Bank Advisory Committee had agreed in principle on a series of measures to reduce the country's debt. Although not all provisions were resolved, the plan offered what was termed a "debt reduction menu." Because of the number of creditors involved, the government provided a wide range of reduction options. Debt reduction, aimed at lowering total debt by onefourth , offered creditors a range of short- and long-term bonds, some guaranteed by the United States Treasury. The various bonds offered highly favorable short-term relief, or conversions into discounted cash, equity, or other debt conversion mechanisms. The reduction plan fell under the auspices of the "Brady Plan," named after United States treasury secretary Nicolas Brady, who devised a worldwide debt reduction program.

As a consequence of the Brady Plan, United States Treasury officials encouraged United States commercial banks to accept the terms of the plan to mitigate the international debt crisis and to strengthen the United States hand in its resolution. American bankers, however, generally frowned upon the Venezuelan plan because of the country's relative prosperity and its track record of questionable economic management. The February 1989 riots, apparently provoked by economic austerity measures, strengthened the Venezuelan government's hand in pressing for debt negotiations. PDVSA's 1989 purchase of the Citgo oil company in the midst of the country's debt negotiations, however, cast doubts in the minds of many United States financiers about the country's genuine need for debt relief.

As early as 1987, Venezuela had initiated a debt-for-equity program to lower its debt, to privatize inefficient semiautonomous government agencies, and to stimulate foreign investment. The plan proceeded slowly, because exchange rate provisions until 1988 offered currency transactions at overvalued official rates rather than market rates. After only three debt swaps in 1988, the Ministry of Finance instituted debt-for-equity auctions in November 1989, where projects previously approved by the state corporation Superintendency of Foreign Investment (Sistema de Inversiones Extranjeras--SIEX) could trade paper debt for discounted bolívares with a monthly limit of US$80 million. Authorities imposed this US$80 million limit to restrain possible surges in the money supply created by bolívar conversions. Such limits, however, prevented debt-for-equity deals in many largerscale projects in mining and petrochemicals. Debt swaps in 1989 and 1990 financed new investments in cement, paper, steel, aluminum, and tourism. Scores of additional SIEX-approved projects, valued at over US$2 billion, awaited further bidding in 1990.

Data as of December 1990

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