For Venezuela, oil is a resource curse

For Venezuela, oil is a resource curse


Russ Dallen, with the investment bank Latinvest, said, “You have to stand in line at the government stores for six to eight hours to get in to see what they have available.”
Dallen said there are black markets, but only if you have tens of thousands of bolivars, or Bs, in your wallet.

“A shirt, for example, that was 5,000 Bs before the December election is now 45,000 Bs,” he said. “So in just the space of one month, some items have gone up nine times what they were.”
So one of the first things on the agenda of the opposition party is to domestically produce food and basic goods.

Right now, just about the only thing Venezuela produces is oil and gas. Other sectors have been crowded out.

“One Venezuelan minister called oil the devil’s excrement, becauVENEZUELA-PARLIAMENT-SUPREME-COURTse it has been a curse to so many countries and caused so much trouble,” Dallen said.

Here’s how it played out under Chavez, and now his successor Nicolas Maduro.

Venezuela spends its petrodollars subsidizing oil to sell it cheap to allies like Cuba and sells ultra-discounted appliances and gasoline to the people, which also drains public money.
“Gasoline is less than a penny a gallon in Venezuela,” Dallen said. “So when I fill up, it costs me less than 25 cents. And the majority of that 25 cents actually goes to pay the tip of the guy that fills up the car.”

LAHT: Venezuela Gold Reserves Fall Below $11 Billion

venz-reserves-23-dec-2015As Venezuela increased its Reserves held by the Central Bank by $1.8 billion in what Latinvest’s Russ Dallen called “the annual end of the year window-dressing”, Dallen also pointed out that Venezuela’s gold reserves had actually fallen below $11 billion in November.

More importantly, says Dallen, the Central Bank quietly released the reserve breakdowns from November, which show that Venezuela’s gold holdings actually fell below $11 billion.

“The reserve figures from November show that Venezuela’s gold holdings fell $120 million to $10.976 billion,” Dallen wrote in a report to Latinvest clients. “That means that Venezuela’s gold holdings have now fallen over $3.5 billion in 2015.”

Venezuela’s reserves had fallen to a 12 year low of $14.583 billion on December 11, the lowest they have been since 2003, notes Dallen.

“In 9 months Venezuela’s reserves fell almost $10 billion from their March high of $24.257 billion,” Dallen said. “And with Venezuela’s mix of heavy oil now fetching under $30 a barrel, with almost $11 billion in foreign debt service next year, inflation over 200%, shortages everywhere, and the country’s institutions set for high intensity political combat, the country is on track for both a financial and civic breakdown.”

Venezuela: It’s the Economic War, Stupid!

“It’s the ‘economic war,’ stupid.”  In simple terms, that’s the Bizarro World version of Clinton strategist James Carville’s slogan that sums up Venezuela President Nicolas Maduro’s reasoning for his government’s loss in Venezuela’s December 6th congressional elections. Instead of owning the economic disaster of crashing GDP, massive shortages, unparalleled currency devaluation and hyperinflation caused by 15 years of unrealistic communist policies and promising to right the sinking ship in his Monday madrigal concession speech, Maduro blamed oligarchs and outside forces for the economy’s — and thus his — dismal performance.
Worse, in a telling statement, Maduro went on to argue that: “In Venezuela the opposition has not won. For now, a counter-revolution that is at our doorstep has won.” Then he insisted that what the country needed was more radicalization — not less — and promised to deliver it.  “The struggle for the construction of socialism is just beginning,” he declared, and went on to say he would double down on his disastrous economic policy.
Sadly, despite the opposition’s overwhelming victory in Sunday’s congressional elections, things will remain bad in Venezuela and will likely worsen as political infighting and retrenchment increase.  Here is why.
What will the Venezuela government do now?
Maduro has called for a week of discussion in his party.  He has called a special meeting for all the organizations that make up the GPP – the umbrella group of those who support the revolution.  Tuesday night Maduro announced that he was firing his whole cabinet.
Next Wednesday, Maduro will gather with all 900 of the government political party PSUV delegates to evaluate the situation, make plans and create proposals.
  1. The Communal Powers
More importantly, for Saturday, Maduro called a meeting of the presidential councils of popular power.  These “Communes” have been largely ignored by the opposition and the vast majority of the councils are heavily Chavista.  Venezuela passed the Organic Law of the Communes in December 2010, and the Ministry of Communes claims that there are over 40,000 community councils, with over 1000 communes.  Maduro increased the 2015 budget of the Ministry of Communes by 62% in preparation for their increasing importance in his strategy. In the Chavez-Maduro version of the communes, residents unite in a number of community councils with the object of self-governance through a communal parliament – a parallel structure to the existing municipal, state and national structures financed from the executive branch.  This is part of what the government labels its grass-roots “participatory democracy” that Maduro could turn to in order to get around the opposition-dominated National Assembly.
The government has followed the cut, isolate and neuter strategy before.  When Opposition leader Antonio Ledezma defeated the Chavistas for the important and symbolic Caracas mayor position  in 2008, the Chavista dominated National Assembly created a new “Capital District,” took away all the mayor’s power, money and responsibilities, and gave it to a new Chavez-appointed Caracas governor.  Ledezma was subsequently arrested on trumped up charges of participating in an “American plot to overthrow the government,” jailed and is currently still under house arrest after undergoing medical treatment.
  1. The Supreme Court
This is possibly the most important and primary tool in the Chavista arsenal to maintain power and, like the communes, the signs point to the work that the government has been doing to prepare for Maduro’s reliance on the Supreme Justice Tribunal (TSJ).  In October, the government persuaded 13 judges of the TSJ to take early retirement.  Some of the judges were of questionable loyalty and many were set to have their terms expire in 2016, which would have allowed the new opposition-controlled National Assembly to appoint them, so having them resign now allows Maduro to replace them with loyalists.
National Assembly President Diosdado Cabello – who participated with Chavez in the coup in 1992 – said Tuesday that the National Assembly would be appointing those 13 new TSJ judges before the end of the year (likely over the Christmas holidays, which is what they also did last year).  The government will, thus, rely on its fully-packed Supreme Court with its powerful 7 member Constitutional chamber to overturn, neutralize or block any movements from the incoming opposition-dominated National Assembly.  Since 2004 (after Chavez packed it with another 12 loyal justices after his original 20 appointed justices dared to rule against him), the Supreme Court has never ruled against the government.  And it only takes 4 justices of the Constitutional chamber to rule an action or law unconstitutional — in other words, 4 Chavista justices can defeat the whole of the elected National Assembly.
  1.  Rule-by-Decree Authority
The outgoing National Assembly will probably also pass a decree giving Maduro the power to make and pass laws without the National Assembly, a Rule-by-Decree authority called Ley Habilitante (Enabling Law).  Not only has Maduro been given this authority for most of his term in office, Chavez even did it in advance of the 2010 National Assembly elections which saw the opposition gain a substantial number of seats, though not a majority.  When, of course, the new opposition-dominated National Assembly tries to revoke this Rule-by-Decree authority with its supermajority, the matter will likely end up in the Supreme Court (see #2).
In short, we have a recipe for impasse and any needed economic reforms will likely take a backseat to the power struggles.  It is possible, of course, that some government officials and judges may see the writing on the wall and begin to negotiate about joining with the opposition to save their skins, jobs or just stay out of jail, but cornered rats do not as a general rule behave rationally.
While most news has been understandably focused on the election and its machinations, back in the economics department, things are bad.
 Oil Hits a New Low
First of all, cash inflows are collapsing as the price of Venezuela’s oil basket fell to $34.05 a barrel last week — its lowest since February of 2009.  Venezuela has been lobbying its OPEC partners for months to lower production quotas, but instead got the opposite result as OPEC decided to increase the quota last Friday.  As a result, Venezuela’s oil basket will fall even closer to $30 this week.
Financial Reserves Fall to a New Low
Venezuela Central Bank (BCV) reserves fell to a new low of $14.592 billion last week, the lowest since 2003.  The BCV has strangely not published any reserves figures this week so far.
Gold Reserves Fall to a New Low
The government quietly released October balances on Friday night under the penumbra of the run-up to the election which show that Venezuela’s gold holdings fell almost half-a-billion to $11 billion during October.  That means that Venezuela’s gold reserves have fallen over $3.5 billion so far this year.
Venz BCV Balance 31 Oct 2015.jpg
Unpaid Ships are Piling Up Offshore
Some 60 ships are waiting offshore waiting to be paid before they unload their cargoes, mostly light oil and oil components to mix with Venezuela’s heavy Orinoco oil, according to Reuters. But some are cargo ships. As of October, Venezuelan state importer monopoly Corpovex had only paid for $6 billion of the $19 billion of goods it ordered this year, according to an internal Corpovex document seen by Reuters.
When the anatomy of the government’s failure in the December election is written, this will be an important footnote:  To try to buy votes and create the last minute illusion of a land of plenty to gullible voters, the government had planned 5,000 megamarkets around the country.  In a testimony to the consistent efficiency of the Bolivarian government, the food never arrived.
There has been enormous interest around the country and world about Venezuela and its elections.  I spent the last several weeks travelling around the country and region and participating in various events speaking about Venezuela and nowhere was there more interest than in Washington, D.C., where the Senate Human Rights Caucus headed by Senator Chris Coons and Senator Mark Kirk convened a group of experts to speak about Venezuela and its elections.
Indeed, the U.S. government was following the Venezuela elections so closely that not only did Hillary Clinton speak about the results before they were released at an event on Sunday night (LAHT exclusive video here: ), but the U.S. also had a whole aircraft carrier task force off of Venezuela’s coast monitoring all the signal intelligence and wire traffic (LAHT exclusive here: ).
I also understand from contacts at both the State Department and the Executive Branch that, as part of its strategy to prove that it is getting tough on Venezuela and highlight the country’s corruption, the White House intends to release the names of the 56 Venezuelans who had their U.S. visas revoked this year.
And, finally, also in that focus on Venezuela corruption, it has gone unreported that there are actually 4 sealed indictments in the U.S. arrest of the nephews of Nicolas Maduro and Cilia Flores on narco-trafficking, not just the 2 who have been arrested so far.
So be aware that there are possibly 2 more indictments in that case still to come, should the relevant parties venture outside of the safety of Venezuela.
USA v Campo Flores et al - Docket showing more sealed def - November 2015.jpg
As you can see from the latest docket below, the docket has now been cleaned up to hide the existence of the other 2 sealed indictments in the vault (docket #3 and #4 from above are now missing), so just keep it between us!
USA v Flores Now Missing 2 Sealed Indictments - 4 December 2015.jpg
Thanks again for your continued readership and business.  Please let me know if there is anything else we can assist with.

Is Venezuela Coming Apart?

venz-coming-apart-panelWhen Russell Dallen, publisher of the Latin American Herald Tribune, asked guests attending the Center for Hemispheric Policy’s discussion on Venezuela this month to open the envelopes taped under their seats for a “special surprise,” no one could miss the irony in his voice. Inside were various denominations of the Venezuelan currency, the bolívar.

As Dallen explained, even as the Venezuelan government officially reports that the exchange rate is 6.3 bolívares to $1 US, the current black market rate is 135 times that, at 850 bolívares to $1. This meant that the “lucky” holder of 10 bolívares had won less than a cent.

All this to say that the current state of Venezuela’s economy is in shambles. In the socialist nation basic staples, such as milk and flour, are hard to find. Inflation is rising while oil production, once the nation’s dominant economic driver, continues to plummet.

Gathered at the Westin Colonnade Hotel in Coral Gables on November 12, Dallen and fellow panelists, Javier Corrales of Amherst College, Beatrice Rangel of AMLA Consulting, and Otto Reich, former U.S. assistant secretary of state for Western Hemisphere Affairs, discussed the current situation in Venezuela and the possible effects of the country’s upcoming parliamentary elections, on December 6. Susan Kaufman Purcell, director of the CHP at the University of Miami, moderate the discussion.

CNN en Espanol: Venezuela está quedándose sin dinero en efectivo: ahora comienza a vender reservas de oro

“¿Qué clase de gobierno se necesita para llevar a un país que cuenta con las mayores reservas de petróleo en el mundo al borde de la quiebra?”, dice Russ Dallen, socio gerente de Caracas Capital Markets, una firma con sede en Miami que invierte en Venezuela.


Daily Telegraph: Seven charts showing why Venezuela’s economy is a basket case

chartThe country’s inflation rate is no better, with official figures putting the number at 64pc. However, according to Robert Bottome, publisher of VenEconomy Weekly, it is 100pc and Russ Dallen of Caracas Capital Markets says it is 120pc.

Financial Times: Venezuela’s Citgo and the Revolution’s Praying Mantis School of Business

By Russ Dallen of Caracas Capital Markets

Investing in Venezuela has always been like praying mantis love. On first acquaintance, Bolivarian Venezuela has those big, beautiful Miss Venezuela eyes and those angelic clasped praying hands inspiring trust and confidence, all backed up by glorious profits and yields. But while other investors in Venezuela – from oil companies, to airlines, to consumer products corporations – have been lured to their demise, bondholders have until the past two years been spared from most praying mantis cannibalism, and the action for bondholders has been great! Even if Venezuela has not paid shareholders of ExxonMobil, ConocoPhillips, or the Koch brothers’ Fertinitro, Venezuela paid the bondholders handsomely! Always! But then came the first sign of trouble, from steel company Sidetur, which the Venezuela government expropriated in 2013 and then didn’t pay its bondholders (or shareholders).

Subsequently, over the past year, Venezuela bondholders have finally gotten their heads ripped off. Now the Praying Mantis School of Business is landing on American shores. (For those unacquainted with the sexual cannibalism of the praying mantis, you can watch a two-minute video here.)

In July, Citgo, the US refining subsidiary of PDVSA, Venezuela’s state oil group, issued $650m in new debt with seemingly strong covenants to protect bondholders. The first hint of doom should have been the identity of the lawyers who wrote Venezuela’s side of the Citgo bond offering memorandum – Curtis, Mallet-Prevost, Colt & Mosle. George Kahale III, Curtis Mallet’s chairman and former managing partner, is the ace in Venezuela’s arsenal and has been the Bolivarian Republic’s chief defender in its multitude of expropriation cases. The guy is better than good – he is the Red Baron of their legal defence.

The bond prospectus seems to have some pretty strong covenants to protect existing lenders and bondholders from just the sort of thing that Citgo is now trying to do:

The New Senior Credit Facility will also be governed by a financial covenant providing for an indebtedness to total capitalization ratio of no more than 60%, to be calculated on a consolidated basis and for each consecutive four fiscal quarter period.
Payments of Dividends. The New Senior Credit Facility will allow us to pay dividends equal to 100% of our cumulative net income (commencing from April 1, 2014 and excluding the aftertax effect of gain on sales of assets) plus net after-tax proceeds from certain permitted assets sales. The New Senior Credit Facility will prohibit us from paying dividends during the existence of an event of default and to the extent payment of dividends would trigger an event of default, and further restrict our payment of dividends by instituting a number of debt incurrence tests, including the following:
• minimum liquidity of $500 million post-dividend; and
• maximum indebtedness to total capitalization of 55% post-dividend.
Incurrence of Indebtedness. The New Senior Credit Facility will allow us to issue the notes offered hereby. In addition, the New Senior Credit Facility will allow us to issue up to $1,000 million in additional secured and unsecured indebtedness, a portion of which indebtedness may be incurred in the form of fixed rate IRBs. To the extent we issue additional secured indebtedness, it may share in the collateral securing the New Senior Credit Facility and the notes offered hereby on a pari passu basis. We currently have $108 million IRBs outstanding. All but $3 million of our outstanding IRBs will be secured on an equal and ratable basis by the collateral securing the notes and the New Senior Credit Facility.”

How is Venezuela able to get around these rules, which restrict the ability of PDVSA to dilute Citgo’s credit quality and the ring-fencing which includes a debt/cap maximum of 60 per cent, with a lower 55 per cent test for purposes of making distributions to the parent?

Two major moves:

1. They are taking PDV America, Inc and changing its name to Citgo Holding, Inc, which will issue the debt above Citgo Petroleum Corporation. Here is the ownership structure before the name change:

2. They are taking the terminals (East Chicago, Linden, Albany, Toledo and Dayton) and pipeline assets – which, though mentioned in the prospectus, were not security for the original bondholders – and getting them out from underneath the bondholders by borrowing billions in the name of this new holding company and selling the assets to their own new holding company for $750m as they suck out the money, since they are allowed to repatriate profits from sales of assets.

Previously, Venezuela was trying to sell Citgo but that looks to be effectively blocked by ongoing legal actions and threatened legal actions from creditors like ConocoPhillips (no judgment yet, but estimated at $4.5bn), ExxonMobil (has ICSID judgement for $1.7bn) and Gold Reserve (has ICSID judgment for $745m). Texas judge Caroline Baker has not yet ruled on ConocoPhillips Petrozuata’s discovery request on Citgo’s sale, where ConocoPhillips said it would try to prevent the proceeds of a Citgo sale from leaving the country, but the writing was on the wall and buyers are obviously worried about being caught up in years of legal wrangling.

So, because they owed so many people, they were unable to sell Citgo, which we had estimated could realize $5bn to $7bn when oil was at $100 a barrel. Instead, they are getting around bondholder and lender protections and sucking the money out of it by forming a new company called Citgo Holdings, Inc above existing bondholders and loading it up with new debt of $2.5bn, with “$1.5 billion as a high yield offering” and a “$1 billion senior secured first lien five-year term loan B.”

As of December 31, 2014, Citgo’s total debt was already $1.91bn.

In the new structure, Citgo Holding, Inc will own 100 per cent of Citgo as well as the new owner of five oil products terminals, Citgo Holding Terminals, plus two pipeline companies, Southwest Pipeline Holding and Midwest Pipeline Holding. During the last 12 months ended in September 2014, these assets generated just $40m in EBITDA – not even enough to pay half of the interest on the $1bn Term Loan B, much less the interest on a $1.5bn bond!

The new Term Loan B and the secured notes will only be guaranteed by the terminal and pipeline companies; Citgo is not a guarantor of the proposed transactions. As Moody’s notes:

The security package for the Term Loan B and the notes is weak as it will only include the terminals and pipelines to be acquired from Citgo plus 49% of the capital stock of Citgo.

Citgo Holding, Inc will also maintain a reserve account for the benefit of the creditors. The reserve account will be funded on the issue date with funds sufficient to cover one semi-annual interest payment on the debt; the issuer will be obligated to maintain at least such level in the reserve account until the maturity of the loan and the notes. Of course, Sidetur also had such a covenant, and Venezuela defaulted on that in 2013.

Citgo is having to offer over 10 per cent on the loan and is still not finding many takers. Current price talk is about 800 basis points over Libor on the five-year senior secured first-lien Term Loan B, according to lead manager Deutsche Bank. There is a Libor floor of 1 per cent – meaning that the interest paid on the principal would be at least 9 per cent – and it will be issued at a discount of 96–97 (ie not 100, par) to bring the yield above 10 per cent. Meanwhile, Venezuela and PDVSA debt is offering yields of as much as 63 per cent in two years and still having trouble finding takers.

As is apparent, Venezuela is starved for cash. The country must pay a total of $11bn in US dollar/euro maturities, amortization and interest this year. In February alone, Venezuela, PDVSA and Citgo have to pay over $750m in interest payments on bonds. In March, they have to retire the 1 billion euro Venezuela 7 per cent of 2015.

Venezuela’s oil basket averaged $39.52 a barrel this week. According to December’s Opec statistics, Venezuela is producing 2.33m barrels a day, but 800,000 barrels are used in domestic consumption, Cuba gets some free (it was 100,000), China was getting 450,000 barrels a day of their 650,000 in imports as payments toward the $50bn they have already loaned Venezuela. In short, Venezuela only realizes cash from 1.2m to 1.5m barrels a day. At 1.5m bpd at $39.52, it gets $59.3m a day, or $21.6bn for the year. For 1.2m bpd at $39.52, it is just $47m a day, or $17.3bn for the year – barely enough to cover the $11bn in debt, much less pay your oil providers, suppliers and personnel, not to mention imports and everything else.

Source: Opec

Addendum – Maduro’s dog & pony show
One other thing: like many analysts and masochistic observers, I sat through the five hours of the Dog and Pony Show that was Maduro’s Annual Address to the National Assembly last Wednesday night. I must say that I had a moment of positive thought when the cameras showed banners of Maduro with China’s Xi Jinping – Maduro had promised to reveal all the details of all the money he had gotten on his Beg, Borrow or Steal Tour, so I thought “Oh, maybe he really did get the $20bn from China or maybe even the billions from the Qataris and he is going finally tell us about it! Wow!” So, what did Maduro say about the so-called billions he said he had gotten on his tour from China and Qatar? Nothing. Crickets. He said nothing at all. Almost like it had never really happened. Welcome to the Praying Mantis School of Business.

Russ Dallen is managing partner of investment bank Caracas Capital Markets in Venezuela and publisher of the Latin American Herald Tribune.


Maduro’s Qatar-to-China tour fails as oil rout deepens

“It was a surprise that he went on tour with such short notice, but the results have been unsurprising,” Russell Dallen, Miami-based managing partner at Caracas Capital Markets, said in a telephone interview.

CNN en Espanol: Venezuela carece de mucho más que las papas fritas de McDonald’s

“El país está implosionando”, dice Russell Dallen, socio administrativo de Caracas Capital Markets, una compañía con sede en Miami que se especializa en valores latinoamericanos. “Venezuela no podría pagar sus deudas con el costo del petróleo a 100 dólares el barril y, definitivamente, será mucho más difícil que las pague con el precio actual de 40 dólares el barril”.

Venezuela no vende lo suficiente de su petróleo para cubrir su deuda, dice Dallen. Aunque Venezuela produce alrededor de 2,3 millones de barriles de petróleo al día, los venezolanos consumen la tercera parte de esa cantidad y casi no pagan nada por ella. Aunque el país también envía una gran cantidad de petróleo a China, el ingreso, casi en su totalidad, sirve para pagar las deudas anteriores, según indicó Dallen.


CNN: Venezuela lacks a lot more than McDonald’s French fries

“The country is imploding,” says Russell Dallen, managing partner of Caracas Capital Markets, a Miami-based firm that specializes in Latin American securities. “Venezuela couldn’t pay its bills at $100 a barrel of oil and it’s darn sure going to have a hard time paying them at $40 a barrel of oil.”

Venezuela does not sell enough of its oil to cover its debt, Dallen says. Although Venezuela produces about 2.3 million barrels of oil a day, Venezuelans consume a third of that and pay almost nothing for it. While the country also sends a lot of oil to China, it’s almost entirely to pay off previous debts, according to Dallen.

The South American nation has $11 billion in debt payments this year. The critical moment will come in October, experts say, when about $5 billion is due. Maduro has not asked the International Monetary Fund or World Bank for financial help.

Financial Times: Is Venezuela finally ready to sell Citgo?

citgo-lemontRuss Dallen of Caracas Capital Markets told beyondbrics by email:

They would like to sell it, but they are trying to talk up their book. It is worth about $5-7bn, not the $10-15bn they were are trying to assert they have offers. But, they need the money. They have huge dollar shortages at home. They have 2 bonds for $4.5 bn maturing in October to pay off, in addition to high interest, and they are also concerned about the large arbitration judgments that loom in their future.

Financial Times: Argentina’s holdout saga: pacta sunt servanda

The most casual followers of the Argentine debt saga will be familiar with the Latin term pari passu, or “equal footing” – or, in this case, equal payment to all holders of Argentine bonds, whether or not those holders took part in the country’s two restructuring programmes in 2005 and 2010 following its 2001 default.

Now Russ Dallen of Caracas Capital Markets, a veteran commentator on and broker in Latin America’s most exotic bond markets, has introduced another smattering of Latin to the story: pacta sunt servanda, or “contracts are for keeping”.

That’s what Dallen wrote to investors on Thursday as the basket of defaulted Argentina bonds, bought by Dallen for clients last year when they were trading for 30 something cents on the dollar, rose through the mid 80s to reach a bid price of 90 cents on the dollar.

This from his note:

While Argentina rails and nashes their teeth at the injustice of it all, the US courts in the end are simply enforcing contract law; and like it or not, Argentina wrote bad contracts (or good contracts, depending on which side of the litigation fence you are on).

There are about $3bn worth of untendered Argentine debt – bonds that did not take part in the restructuring – including about $1.3bn held by investors who have sued Argentina in the US (because the bonds were written under US law), led by Paul Singer’s NML Capital.

Source: Russ Dallen, Caracas Capital Markets

The defaulted bonds have shot up in value since the US Supreme Court refused on June 16 to overturn previous rulings that ordered Buenos Aires to pay the holdouts according to the contracts on their bonds. They are now, says Dallen, approaching face value.

But what if the contracts really are for keeping?

There are many different instruments in the bundles traded generically as defaulted Argentine debt. In a normal bond market, bonds are traded with interest: a bond that pays interest every six months will rise in price over the course of each six month period in accordance with the amount of due interest accrued. Argentine defaulted bonds are traded without interest, on the assumption that no interest will be paid.

However, if the contracts are enforced as written, that could change dramatically in bond holders’ favour: they would get not only 100 cents on the dollar but also the amount of interest unpaid since the default nearly 13 years ago, which could typically double or triple the bonds’ face value.

Might that happen? It just might. The prospect would certainly tend to push the price of the bonds up rather than down. And it would add to what Dallen says is an extreme mismatch between people now clamouring to buy the bonds and those willing to sell.

“It may well be that Argentina is buying the bonds back,” he says. “It would make sense and it would certainly be the cheapest solution for them, especially if they will have to pay a multiple.”

Argentina’s best course of action now would appear to be to negotiate in good faithwith the holdouts. It may well be able to settle for less than the full amount in the bonds’ contracts. Says Dallen, who got his law degrees from Christchurch College Oxford and Nottingham University in the UK and Columbia Law School in the US: “The first thing they teach you on both sides of the Atlantic is pacta sunt servanda. Then they teach you how to get out of it.”