Are Venezuelan bondholders trying to jump the line?

On May 13, 2026, the government of Venezuela announced its intent to commence the restructuring process of its sovereign debt and the debt of its state-owned oil company PDVSA. This announcement came as a considerable surprise, as the country currently lacks a viable economic program to address one of the most significant economic reconstruction challenges of our time. The absence of a roadmap for democratic transition heightens uncertainty and undermines the prospects for a robust recovery.[1]

Furthermore, there is no cohesive economic team in place to determine the financing required to stabilize the economy, support its beleaguered population, rebuild its public infrastructure, absorb potential returning expatriates, and regain control over territory affected by organized crime. Even more puzzling is that the country has no reliable national accounts nor public finance statistics to put together these wildly uncertain scenarios. This raises concerns that Venezuelan authorities may be prioritizing market investors over the welfare of their citizens or be succumbing to pressures from bondholders who seek to appropriate a piece of the resources from the country's renewed oil production.

Another anomaly is that the International Monetary Fund (IMF) does not seem to be part of the process. Normally, the IMF's debt sustainability analysis is the cornerstone of restructurings and often acts as an impartial broker that assesses the country's capacity to pay, while remaining responsible to its citizens. In most cases, the IMF financially supports the country and, through its conditionality, provides incentives to implement those policies that will put the economy back on track. By doing this, the IMF maximizes the probability that the restructured bonds will be repaid. If the IMF is not at the table, bond investors might think they can get a better deal, at the expense of the Venezuelan population.

The market appears to be treating Venezuela's restructuring as technically intricate yet economically routine. With sovereign and quasi-sovereign issuers, institutional investors, multilateral organizations, bilateral creditors (notably China), and substantial arbitration claims in play, this restructuring is poised to be one of the most complex in modern history.[2] Venezuela's total debt is estimated at around $170 billion—between 180 percent to 200 percent of its GDP. With these numbers, market economists run sustainability models, make assumptions about potential oil production recovery, and allocate future revenues among oil firms, foreign investors, creditors, and the government—the typical tension in any restructuring scenario.

What is often overlooked is context: For over two decades, authoritarian populism has ravaged Venezuela. The country has experienced one of the most severe peacetime contractions in the last 130 years, reminiscent of post-WWII Germany and pre-1990 Iraq.[3] In 2020, GDP per capita plummeted to about 70 percent below its peak in 2014; today, it rests at roughly 50 percent of that figure. The economic situation remains dire: The national poverty rate hovers around 70 percent, and nearly 8 million Venezuelans—almost 25 percent of the population—have fled the country, having experienced very high inflation, including one hyperinflation episode.

Unlike wartime collapses where the capital stock is obliterated, Venezuela's capital has only severely depreciated. Given the country's reliance on oil, recovery may depend more on international legislation than on fully rebuilt domestic institutions. The oil production recovery in the last three months has been impressive, and recent oil price spikes support the assumptions that this recovery will continue.

A cursory analysis of the high correlation between oil revenue and GDP from 2003 to 2013 might generate optimism about the potential of the rapid oil production recovery to rapidly boost GDP. However, during that decade, gains in oil income stemmed solely from price increases, resulting in a pure windfall: With no need to cover additional costs or increase investor's compensation, such resources were directly channeled back into the economy to stimulate aggregate demand and growth. But in today's case, future oil income increases will likely stem from new production, which requires progressively more investment, subject to significant discounts for heavy oil, with a growing share of profits accruing to the investing oil companies, reducing the benefit to the non-oil economy and society. The lack of transparency regarding the increase in oil production and its allocation further complicates the analysis of how it will contribute to economic recovery.

Reconstructing Venezuela will present one of the most arduous challenges any Latin American nation has ever encountered and will require significant public resources that will come from the international financial institutions whose debt is senior to current bondholders. Compounding this difficulty is the uncertainty surrounding the lack of a genuine political transition, as the legal standing of the current government may be contested, potentially nullifying commitments made by it under a democratically elected administration. The dual challenge of achieving both democratic and economic transition can extend over many years, leaving a profound ambiguity regarding future oil production, economic activity, and, crucially, the population's welfare. In addition, Venezuela's economic recovery will also depend on luring a fraction of the 8 million Venezuelans living abroad to be part of this effort—which will not happen without a political transition.

Considering these complexities, international creditors and arbitration claims should be converted into equity-like partners in Venezuela's future through a two-step process. First, the international community should protect Venezuela's foreign assets and income from creditor claims for an extended period. The current US executive order that protects Venezuelan revenues from attachment is narrow and only applies to transactions with the United States. A broader protection should be established following Iraq's precedent in 2003. For instance, the United States could sponsor a UN resolution—or another type of coordinated legal action—binding on UN members to declare Venezuela's proceeds from oil sales and other foreign assets immune from attachment. The resolution could be enforced in the United States through an executive order and in other countries through the proper legal instruments. The second step, the restructuring of old debts, should be deferred under the protection of the UN resolution until uncertainties are diminished and the nation is on a path towards a more stable future.

Alternatively, these debts could be restructured earlier by converting them into perpetual instruments: To align financial returns with genuine recovery, payouts would commence only when the government's cut of oil proceeds, or some measure linked to non-oil GDP, sustainably exceeds a defined threshold, aligning financial returns with genuine recovery. Obviously, this trigger must be easily verifiable and not subject to manipulation or measurement issues. These actions would enable Venezuela, during the first phase of its reconstruction, to use all available resources on rebuilding its institutions, economy, and social infrastructure.

Restructuring economies after populist regimes has proven extremely complex and lengthy, even in cases where the damage to economic, social, and institutional frameworks was significantly less severe than Venezuela's. Recovery efforts require rebuilding rules-based and modern institutional, political, and economic frameworks. Investors who placed their bets behind the success of an oil-based authoritarian regime should stand at the end of the line, after the new private and official capital that will support the rebuilding is compensated, social indicators are brought back to a humane level, and the economy is back on a sustainable recovery path.

Notes

1. For a description of the current situation in Venezuela see: Ricardo Hausmann, "The Rape of Venezuela," Project Syndicate, June 2, 2026.  

2. For the most up to date description of the legal challenges that this process will face, see Katherine Shen, Green Light, Red Tape: Barriers to Venezuela's Debt Restructuring, May 15, 2026.

3. See José F. Ursúa and Alejandro Werner, Rare macroeconomic disasters and lost decades in Latin America: The COVID-19 experience in a historical context, Working Paper 23-7, September 2023.