- The Washington Times - Friday, April 18, 2003

As Venezuela's President Hugo Chavez celebrated the anniversary of his triumph over a short-lived coup against him this month, another, very different kind of threat emerged the possibility of default. A combination of tight financing and excessively optimistic economic presumptions could lead to Venezuela to default on its debt this year, particularly if Mr. Chavez fails to hold a referendum on the need for new elections, as he agreed to do last Friday. Also critical to Venezuela's ability to pay will be the price of oil, which is expected to trend downward as the military campaign in Iraq comes to a close.
A default in Venezuela would have a two-pronged effect on U.S. interests. It could lead to a full-blown, Argentina-style economic meltdown, since the government would be unable to secure any kind of multilateral financing. And market financing would become virtually nonexistent. The economic crisis could therefore turn into severe political and social upheaval. This volatility would call into question Venezuela's ability to supply the United States with oil. Currently, Venezuela is America's fifth-largest supplier of foreign crude oil.
A Venezuelan default would also contribute to instability in the Andean region, and could, in a worst-case scenario, lead to a face-off between Colombia and Venezuela, which are currently in a war of words over Venezuela's alleged harboring of Colombian terrorists. This would lead to some difficult foreign-policy decisions for the Bush administration. And trouble in the Andean region would be felt in America through the inflow of drugs and refugees.
Venezuela's debt will total about $34 billion this year, or about 40 percent of gross domestic product, with large debt payments coming due in June, September, October and December. The government has probably overstated the price of oil this year and the amount of external financing it is likely to get. Also, the government's projections for non-oil-related revenue are too rosy. While the Venezuelan government expects to earn $18.1 billion in total revenue, Jose M. Barrionuevo, head of emerging markets strategy at Barclays Bank, pegs that number at $16 billion. Also, the government's external market financing will likely be about $3 billion less than it has budgeted. Therefore, Venezuela's average default probability is 57 percent for this year, with that number rising to 70 percent in the fourth quarter if the political situation in Venezuela remains unresolved, Mr. Barrionuevo said.
Mr. Chavez's comments last month to small-business owners signaling his intention to restructure Venezuela's external debt this year make this fiscal scenario even more worrisome. After the president's statements caused a market panic, his government said Mr. Chavez sought a voluntary swap of debt, not a forced restructuring.
Still, his best option for avoiding default would be to hold a referendum on elections. Such a move may lure back some investor financing. The United States and other countries brokering talks between Mr. Chavez and the opposition have a strong interest in seeing this referendum held to avert an unwelcome crisis in Venezuela and the region.

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