Venezuela Allows Contract To Lapse On The $1.7B Gold Lease To Deutsche Bank

The contract has lapsed. Venezuela will get another $500,000,000 (USD) and Deutsche Bank gets the gold. Here’s the latest developments…

In the beginning of 2016, Venezuela swapped some gold with Deutsche Bank:

Venezuela’s central bank has begun negotiations with the suddenly troubled Deutsche Bank to carry out gold swaps “to improve the liquidity of its foreign reserves as it faces heavy debt payments this year”, payments which it won’t be able to fund unless it manages to “liquify” its gold.

One look at Venezuela’s CDS which imply a 78% probability of default in the next year reflect the $9.5 billion in debt service costs this year.

Fast forward to today, and Reuters is reporting that Venezuela has defaulted on the lease:

CARACAS (Reuters) – Venezuela this month allowed a $1.7 billion gold swap with Germany’s Deutsche Bank AG (DBKGn.DE) to lapse, according to an opposition legislator who said it weakens the balance sheet of the crisis-stricken OPEC nation’s central bank.

Through the operation, Venezuela had received $1.2 billion in cash in exchange for putting up $1.7 billion worth of gold in guarantee, part of efforts to improve the liquidity of foreign reserves amid heavy foreign debt payments and low oil prices.

Legislator Angel Alvarado said the contract’s expiration weakens international reserves, which are hovering near 21-year lows as the country’s socialist economic model collapses under low oil prices.

Further reporting from CNBC shows that Venezuela’s debt and finance problems are mounting by the day:

As of last Friday, Venezuela had racked up $349 million in unpaid bond interest. This weekend, it failed to make payments totaling $237 million due on another two sovereign bonds.

There is some consensus forming around the idea that Venezuela is squirreling away its pennies to make sure it is able to pay the $841 million in principal, plus interest, due on Friday on a bond issued by PDVSA, the state oil company. The collateral against the bond is Citgo, PDVSA’s Houston-based refining and retail subsidiary.

The following week, on Nov. 2, a nearly $1.2 billion PDVSA bond is maturing. Unlike the interest payments Venezuela has missed this month, the two major principal payments do not have grace periods.

“This weekend, there’s either going to be a lot of bond holders and traders drinking champagne, or there’s going to be a lot of stressed fund managers,” Dallen said.

One school of thought says that recent U.S. sanctions may be making it more difficult for Venezuela to transfer payments through the international financial system.

For some alternative analysis on the collapse of Venezuela, here’s Stefan Molyneux