Dr Tom Long, Assistant Professor in New Rising World Powers in the university's department of Politics and International Affairs, comments on Venezuela's financial problems as the country is declared in default by S&P.

"Even as its domestic economic crisis intensified, Venezuela continued to meet its obligations on international loans. In that context, yesterday's technical default is a major warning sign.

"Venezuelan President Nicolas Maduro has consistently chosen painful domestic austerity over default, but even dramatic cuts to imports and the fire sale of overseas assets no longer appears to be enough to meet mounting payments.

"The root of the fiscal problem lies in decades of mismanagement of the country's state oil company, PDVSA, and in a wasteful system of controlled exchange rates. Despite having massive oil reserves, PDVSA's production has fallen, stripping the state of its key revenue source. Meanwhile, currency reserves have been depleted in a Byzantine system of multiple exchange rates that benefits insiders and creates massive opportunities for graft.

"This default does not necessarily spell Maduro's downfall, however. Investors have incentives to make arrangements with the oil-rich country rather than risking a total break. Many of Maduro's key supporters remain entrenched and have few other options, given international sanctions and prosecution. Because government and military insiders face a bleak future under an opposition-led government, they may be willing to suffer the consequences of default and restructuring rather than taking a chance on the alternative."

14 November 2017

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