Just under a year ago in the aftermath of the "OPEC Thanksgiving Massacre" of 2014 which sent oil crashing when Saudi Arabia effectively ended the oil cartel, we predicted that Venezuela (with its CDS trading at 2300 bps back then) would become the first casualty of the "crude carnage." Since then not only has Venezuela, which relies on crude oil for 95% of its export revenue, suffered a dramatic episode of hyperinflation (which is only accelerating) coupled with total economic collapse, but its CDS has, as expected, blown out to reflect a default of probability at 96% over the next five years as shown below.
Yet while everyone promptly jumped on the "Venezuela will default bandwagon" it has so far avoided bankruptcy.
How can this country with a massive debt load and a paralyzed economy have avoided default so far?
For one thing, it has been drawing down on its FX reserves at an unprecedented pace. Venezuela's international reserves are hovering near a 12-year low of $15.2 billion.
According to Barclays economist Alejandro Arreaza, the latest figures support estimates that Venezuela had about $42 billion of total assets, including off-budget funds, at the end of the third quarter, of which $15 billion was liquid. He said liquid assets will fall to about $8 billion by year end. The country and its state oil company have $12 billion in bond payments coming due next year.
But before we get to next year, there are still two more months left in 2015, as well as two immediate bond payments due this week and next, amounting to $3.5 billion.
Where did Venezuela obtain the funds needed to make these debt payments?
The answer: it has been dumping its gold, which its former ruler Chavez worked hard in 2011 to repatriate from London, and which its current president Maduro, just four short years later, is busy sending back to its creditors.
According to Bloomberg, "in a sign of how Venezuela is growing increasingly desperate to acquire hard currency, a report released this week showed the country has been stepping up its sales of gold."
The value of the central bank’s bullion holdings fell 28 percent at the end of May from a year earlier, while the spot price for the metal declined just 12 percent. The figures, while reflecting transactions that took place five months ago, underscore the efforts the government is taking to raise the cash to repay creditors and fund imports amid a punishing recession, inflation exceeding 100 percent and a collapse in the price of its main export, oil.
Reuters adds that just in 2015, Caracas has parted with 19% of its gold holdings: "Central bank financial statements posted this week on its website show monetary gold totaled 91.41 billion bolivars in January and 74.14 billion bolivars in May. At the strongest official exchange rate of 6.3 bolivars per U.S. dollar, which the bank uses for its financial statements, that decline would be equivalent to $2.74 billion."
Reuters in March reported that the central bank was in talks with Wall Street to monetize about $1.5 billion of gold in reserves, an operation the bank did not confirm at the time. The central bank declined to comment.
The good news is that as of May, gold comprised roughly 58% of Venezuela's international reserves, or about $11.8 billion according to Bloomberg calculations. It is unclear how much more gold Venezuela has sold in the past 5 months.
The bad news is that this gold will also be gone soon: with $12 billion in debt due in 2016, it is likely that the Latin American nation will run out of liquid reserves in the next 12 months.
Barclays analysts said in a research note on Wednesday that they expect Venezuela will use gold reserves to gain liquidity to ensure bond payments through at least the first quarter of 2016.
After that, barring a miraculous surge in the price of oil, Caracas is on its own.
But the worst news, if only for Ben Bernanke, is that Venezuela has one again proven, without a doubt, that when it comes to Venezuela's all too sophisticated Wall Street-based creditors, gold is perfectly equivalent to money.
As for Venezuela, after it runs out of gold in its inexplicable quest to placate creditors and postpone a default which at this point is unavoidable, at least it will have toilet paper.