Venezuela in selective default on domestic debt

Venezuela has selectively defaulted on its domestic commercial debt, suspending payments to a wide gamut of creditors owed more than $14 billion, economists here say. The leftist government of President Nicolas Maduro has kept up payments on its sovereign bonds and those of state oil company PDVSA to avoid the risk of asset seizures. But its unpaid debts with importers of automobiles and auto parts, medical supplies, chemicals and airlines exceed $14 billion, according to former Central Bank of Venezuela manager Jose Guerra, who adds that "a commercial default has been incurred, a suspension of payments." "The government decided to engage in a selective default in the internal market and not the external," agrees Luis Oliveros, an economist and professor at the Central University of Venezuela. In a country with the world's largest oil reserves, but which imports nearly everything it consumes, the unpaid debts pose a mounting threat to the faltering economy, as well as to already chronic shortages of food and medicine that are getting worse. Many industries already are paralyzed by the lack of supplies -- including five auto assembly plants -- and airlines have either drastically reduced flights to Venezuela or, in the case of Air Canada and Alitalia, have pulled out of the market altogether. "The country has been in dire straits in terms of hard currency for a long time," said Francisco Ibarra, an economist with the consulting firm Econometrica. "Those funds that the government said were there (to guarantee imports) aren't," he said, alluding to a complex structure of opaquely managed government hard currency funds. - Government indecision - Late president Hugo Chavez, who died last year of cancer, tried to lead Venezuela to what he called "Socialism of the Twenty-First Century" with a centralized economy managed by the state through strict price, production and exchange controls. But the "new internal economic order in transition to socialism" -- as the government calls it -- has led to 60 percent inflation and widespread shortages that have fueled months of violent protests in which 42 people have been killed and 800 injured. Caracas refuses to acknowledge that the rebellious climate is in reaction to its economic policies, and instead attributes the protests to an "attempted coup" by parts of the radical right. Since taking office 13 months ago, Maduro has avoided taking unpopular measures like cutting public spending to reduce a ballooning deficit, which is running at an estimated 15 percent of GDP. And he has emphatically rejected, on at least 10 occasions, a devaluation of the Venezuelan currency. Analysts are skeptical that the government will do what is necessary to pull the economy out of a tailspin because of divisions within a cabinet made up of radical Marxists, many leftist nationalist military officers and a few low-profile pragmatists. "This imbalance is unsustainable," said Ibarra. He said the ruling Chavistas must change course, but he doubts they will because the measures required "are drastic, very difficult to adopt, with people in the government who can't agree among themselves." Even so, when the black market rate for the dollar hit twice that of the official rate earlier this year, the government undertook a disguised devaluation by expanding its multi-tiered exchange rate system, and raising the top rate to close to black market levels. - Promises but no dollars - Business leaders, meanwhile, warn that their inventories are falling and they are unable to restock because of the lack of dollars. The government had promised to make available $42 billion to meet 80 percent of all hard currency requirements for production, food, health and education. Richard Obuchi, an economist and professor at the Instituto de Estudios Superiores de Administracion (IESA), said, however, "the dollars now don't appear to exist." This is "one of the most serious problems" that have paralyzed domestic production, he said. Although the government says PDVSA exports nearly $100 billion in oil a year, the figure is an approximation because the oil company has still not published its audited 2013 statement. What has been confirmed is that the central bank's reserves plummeted by a third in 2013, falling from $30 billion to a little more than $20 billion. "This is a self-inflicted crisis, occurring at a time when oil prices are pretty high," said Ibarra. "Nobody knows what has happened with PDVSA exports because there is no official information and it is a mistake to assume that those funds exist."