A woman with a sign reading "There is no food" protests in front of a line of policemen in Caracas © AFP
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Violent food riots, record inflation, a two-day working week and rolling power blackouts lasting for hours at a time: Venezuela is in the depths of one of the worst economic crises in its history.

Yet, against the odds, the country has remained a dutiful debtor, making payments on billions of dollars of foreign-currency bonds even as hospitals lack the money to pay for antibiotics.

The disciplined commitment to meeting its international debt obligations has defied analysts’ predictions, contributing to an unexpected rally in Venezuelan bonds as investors rethink assumptions of a certain default.

“Venezuela has taken an extreme approach to servicing its debt and avoiding default,” said Guillermo Mondino, emerging markets economist at Citi, the US bank. “Very few countries have gone to similar lengths. Perhaps only Romania under [dictator Nicolae] Ceaușescu in the 1980s.”

Earlier this month, Bank of America Merrill Lynch said it saw “value” in certain Venezuelan bonds as this year’s rebound in oil prices lifted prices for benchmark debt due in 2027 from a record low of 33 cents in the dollar in February to 46 cents. Brent crude hit a fresh eight-month high this week.

While Venezuelan debt still trades at distressed levels, the move suggests greater confidence in higher recovery rates if there is a debt restructuring. The cost of insuring the paper against default has also fallen, although it remains the highest in the world.

Yet within Venezuela, the decision to prioritise foreign lenders when basic goods are in chronic short supply has bewildered citizens.

Standing in a snaking queue of shoppers outside a supermarket in Ocumare del Tuy, a small city in northern Venezuela, 39-year-old Luisa Martínez said Nicolás Maduro’s socialist government was making a grave mistake.

“If they pay that debt first, when are they going to bring food? Their priority should be food so the people do not die of hunger.”

Opec-member Venezuela sits on the world’s largest crude reserves. But its economy, which relies on hydrocarbons for almost all of its export revenues, has been crippled by mismanagement and lower oil prices.

As inflation surged and the economy contracted last year, prices for short-dated bonds dropped to new lows as investors feared they would not be paid back in full.

Exotix, the frontier markets specialist, estimates the outstanding debt of Venezuela and PDVSA, the state oil company, at just under $62bn. Foreign reserves stand at about just $12bn.

Mr Maduro has insisted the country will continue to meet debt payments and announced plans to cut imports by almost half this year in order to preserve the hard currency required to do so.

But sovereign debt lawyers say this may not be purely the result of his belief in upholding the sanctity of the creditor-debtor agreement. Instead, they believe Venezuela’s hands are tied by the legal structure that underpins its sovereign debt.

Nicolás Maduro, Venezuela's president, has insisted the country will continue to meet all its debt payments © AFP

Default could lead to an Argentine-style debacle, with creditors attempting to seize state assets such as Citgo Petroleum Corporation, PDVSA’s US-based subsidiary. A lengthy legal fight with holdout creditors could also cut off Venezuela’s access to financial markets, said Mitu Gulati, a professor at Duke University School of Law.

Like Argentina, most of Venezuela’s bonds lack the “collective action clauses” that would bind all creditors to accept a restructuring deal agreed by the majority. PDVSA bonds also lack the clauses.

Rodolfo Marco Torres, former minister of economy and finance, met in September with investment houses including Pimco, JPMorgan Investment Management, Fidelity and Alliance. However, no deal was announced after the talks.

The government could still attempt to offer an exchange to ease the burden, but investors say they cannot see how the country could tempt them to accept. “Who would want to swap when the country so obviously wants to pay,” said one creditor.

Venezuela’s unanticipated adherence to debt payments has made its bonds highly profitable for investors who bought at low prices.

Claudia Calich, fund manager at M&G, which owns short-dated Venezuelan bonds, said: “So far it’s a miracle they’ve paid. If they continue paying it will be one the top performers. If not, it will be the worst.”

The country now has a short window during which its credit fortunes hang in the balance, with payments of more than $4bn due in October and November set to provide the next test of its solvency.

“Venezuela now has some breathing space before the next payments are due in the autumn,” said Max Wolman, investment manager at Aberdeen Asset Manager, which also owns short-dated Venezuelan bonds. “If oil prices keep rising between now and then who knows. Perhaps it will surprise us all.”

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