Venezuela Errata: Airline Deposits and Administration Posts

By Mitu Gulati and Mark Weidemaier

The new semester has begun, and we are excited about the International Debt class we teach together, with students from both UNC and Duke thinking about the Venezuelan debt crisis. Their first task—and ours—is figuring out how much Venezuela owes, to whom, and under what contract terms. This year, we have been especially unreasonable, asking students, in just a few weeks, to find, read, and code all relevant contract terms for the entire unmatured bond debt of Venezuela and PDVSA. And the bond debt is only part of the story. For instance, another category of debt, which we haven’t encountered before, consists of local currency (bolivar) bank deposits of international airlines that fly routes to and from Venezuela, which the airlines are not-so-patiently waiting to convert into other currencies.

As we understand the story, capital controls instituted by the government years ago have prevented airlines from freely converting bolivars into foreign currency. Instead, airlines have had to wait for permission to sell at the official exchange rate. From 2009 to 2012, according to this New Yorker article, the process took about six months. But delays increased, and no repatriations have been approved since October 2013, except at rates the airlines view as confiscatory. As of June 2014, more than $4 billion in deposits were reportedly trapped in Venezuela. These deposits were generated at a time when the official exchange rate was 6.3 bolivars to the dollar. Today, Venezuela somewhat bizarrely has a system with multiple exchange rates, but the black market rate is probably thousands of bolivars to the dollar.

Venezuela reportedly has acknowledged the debt. But the government has lots of debts, so we wonder how this one will be treated in a restructuring. Is it akin to bond debt, or akin to an unprotected domestic currency obligation? And do the airlines have any contractual leverage, or simply the leverage associated with being major players in a relatively small market of international airlines? We haven’t been able to find out much about these debts, but it’s yet another multi-billion dollar obligation the government must confront.

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On another note: We’re wondering what’s going on with appointments to senior administration positions relevant to the sovereign debt world. The two most noteworthy are Assistant Secretary of the Treasury for International Finance and Deputy Director of the IMF. The seats are either empty or still occupied by Obama-era lame ducks.

The nominee at Treasury is Adam Lerrick, an economist presently at the American Enterprise Institute and a well-known figure in the sovereign debt world. Of particular relevance to Venezuela, Lerrick has put out a noteworthy proposal for restructuring the government’s debts. If his nomination goes through, and if U.S. sanctions are lifted (most likely if there is a new administration in Venezuela), then Treasury will be a key player.

We have seen few U.S. press reports on the Lerrick nomination. Curiously, though, the Irish Times reports on a special purpose vehicle registered in Dublin, which reportedly was advised by Lerrick and held Argentine debt using a children’s charity as trustee. Sounds juicy, although we suspect the real story is less interesting, perhaps having something to do with lower taxes, fees, or reporting obligation in Dublin. In any event, there is an empty chair in D.C. in one of the most important positions in international finance. Of course, with the government closed, there are a lot of empty chairs in D.C. these days. To be frank, we’re kind of okay with that. Eventually, however, it will be important to have someone knowledgeable in this role at Treasury.