Dr. Thomas W. Laryea is an international law and policy expert at Orrick, Herrington & Sutcliffe, he specialises in advising governments and creditors on international finance. He was formerly Assistant General Counsel at the IMF, where he advised on various restructuring cases, including Argentina, Greece and Iraq. In this post, he argues that a new approach needs to be taken on Venezuela’s asset base as it looks to restructure its considerable debt burden.
We are a long way from the end-game in Venezuela’s debt resolution. In a recent twist, the United States Office of Foreign Asset Control precluded, for 90 days, the enforcement of a bond owed by the Venezuela oil company PDVSA. Payment of the bond is secured against PDVSA’s shares in its US subsidiary, the energy giant CITGO.
The policy notion was to approximate the effective standstill faced by other bondholders whose legal and financial positions have been affected by US sanctions. This is a further illustration of how US sanctions have become both a tool, and a counter-tool, in the Venezuela debt restructuring. The CITGO case, however, involves a payment of a “mere” $913 million out of the estimated $200 billion of Venezuela external debt that would be subject to restructuring.
So how would I meet the challenge posed by the needed widescale restructuring?
A concerted effort is needed to rehabilitate the Venezuela economy and to provide a fair recovery to the many creditors. Co-ordination across legal jurisdictions among the different creditor groups — including bondholders of the Republic, bondholders of PDVSA, judgment creditors, arbitral award holders, and official sector creditors — will stretch applicable sovereign debt restructuring tools.
Even the threshold issue of the recognition of the Venezuela government is fraught with international legal and political uncertainty. Last, but not least, the degree of the escalating humanitarian crisis presents another dimension of the challenge in any comprehensive debt resolution scenario.
Where are the assets in the analysis?
Modern approaches to sovereign debt management entail a continual rebalancing of a country’s debt obligations with the objective of refinancing liabilities. From this perspective, sovereign debt restructuring resembles the sharp-end of debt management, when triggered by actual or threatened default.
But what about the assets in the analysis? In my view, traditional analytical tools of sovereign debt sustainability do not sufficiently take into account the asset side of the balance sheet. This observation is evident on a country-by-country basis, eg in the IMF’s debt sustainability analysis frameworks, in which only liquid assets generally affect the economic judgment on debt payment capacity. It is also reflected in the concerns around the current increase in global sovereign debt, which fail to reflect the corresponding increase in assets. A serious analytical point lurks herein.
The question of the assets is very pertinent in the Venezuela situation. I am not limiting this question to Venezuela’s central bank reserves, which are pitifully low, and will inevitably be bolstered by IMF financing.
Indeed, Venezuela has other types of reserves, including massive petroleum and mineral resources that are convertible to foreign exchange proceeds. The potential for Venezuela’s petroleum and mineral assets to rise in value will no doubt inform the design of Value Recovery Instruments that I expect to be a part of the Venezuela debt resolution. Such Value Recovery Instruments mitigate some of the guess work involved in negotiating recovery values based on highly imperfect medium and long-term economic projections.
Recovery of stolen assets?
Venezuela has another important category of assets that should be brought into account in the negotiations between Venezuela and its creditors. These are the stolen or misappropriated assets that could be recovered back into the legitimate economic sphere.
Estimates of the size of stolen or misappropriated assets vary significantly, but some suggest up to $200 billion has disappeared over the last two decades. Even if the number is only $100 billion and let’s say only half of that sum is recoverable, the estimated $50 billion would still represent a significant sum.
The recovered assets should be apportioned towards the mutually-reinforcing goals of rehabilitating the domestic economy and alleviating the creditors who represent the future sources of financing for Venezuela. Furthermore, the expectation that the end-game would involve a fair distribution of the assets would moderate the motivation for disorderly asset grabs by creditors in the interim.
An IMF Administered Account?
Now, of course, many questions remain about how to effectively recover these stolen or misappropriated assets. For instance, where would the recovered assets be housed and through what channels would they be distributed? And what legal mechanism could be used to safeguard them and to protect them from depletion by individual interests?
My idea would be to create a Venezuela Asset Recovery Trust that would be accorded legal immunities recognised by international law. This is not a version of the approach adopted in the Iraq debt restructuring that involved a UN Security Council Resolution that partially immunised Iraq’s petroleum assets. Whether or not Venezuela would be deemed to represent a “threat to peace” in order to warrant a Security Council resolution, the international law approach adopted in Iraq’s case would not feasibly pass through the Security Council given the divergent geopolitical views on Venezuela.
Furthermore, it is worth underscoring that the policy direction driving the idea of the Venezuela Asset Recovery Trust is not to defeat legitimate creditor interests, as arguably was the case in Iraq, but rather to augment the recovery to both legitimate creditors and to Venezuela’s citizens.
I would submit that an international law mechanism to achieve the design and policy objective of the Venezuela Asset Recovery Trust could be achieved through the authority of the IMF to provide, when requested, “technical and financial services” in the form of establishing of an IMF trust or administered account.
The IMF is authorised to do so by Article V, Section 2(b) of the IMF’s Articles of Agreement, which constitute an international treaty among the 189 IMF member countries. A legal advantage of establishing the proposed Venezuela Asset Recovery Trust as an IMF trust/ administered account is that the funds within the Trust would benefit from the legal immunities that all IMF member countries are obliged to make effective in their jurisdictions. Currently, the IMF operates over 50 trusts/administered accounts, including the Poverty Reduction and Growth-Heavily Indebted Poor Countries Trust (which is the legal tool through which the IMF provides HIPC debt relief). With regard to the proposed Venezuela Asset Recovery Trust, its governance structure might include both official and private sector representatives in order to inform the oversight and accountability of its operations.
While there are recognised legal and institutional limitations on the IMF, such as the legal duty of neutrality which precludes the IMF from taking sides in the merits of creditor-debtor disputes, I believe that with sufficient international good will, the proposed Venezuela Asset Recovery Trust can be designed to conform with applicable limitations. For example, the activities of tracing assets and engaging in the actual recovery could be conducted by external advisers and directed by a committee comprising the Venezuela authorities and creditor representatives. But the housing of the recovered assets and the terms of their distribution could, in principle, be established within an IMF trust/ administered account.
Answering the call for innovation
I doubt that the exceptional situation presented by Venezuela could be effectively resolved without innovation in the established sovereign debt restructuring toolkit. With regards to the IMF, rather than just focus on its role as an international lender of last resort, we should also consider the potential for the it to establish a trust/ administered account that would bring into account additional assets as part of an international resolution.
The lead time to design and test legal innovations to supplement the market-based approaches to sovereign debt restructuring can take months, if not years. Now is the time to be innovative about a solution for a restructuring of Venezuela’s assets and liabilities.