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In the past decade, Venezuela and the nation's oil company Petroleos de Venezuela (PDVSA) have sold $65 billion of dollar-denominated bonds without ever seeing a dime.
Sure, they got money, but took in no dollars.
To preserve foreign reserves while injecting some much-needed hard currency into the economy, the government, PDVSA and the central bank sold the debt to local investors in return for bolivars. Buyers then sold the notes abroad to obtain U.S. currency, which has become scarce as Venezuela tries to limit capital flight.
With $4.5 billion of debt coming due this month and reserves at an 11-year low, Venezuela is realizing the bond sales didn't actually buy it much time and are instead exacerbating a cash crunch that's fueling concern the country will default. The nation's bonds have plummeted 9.5 percent in the past month, the most in emerging markets.
"Bonds were being sold as a foreign-exchange mechanism and then being flogged out at a deep discount, so the government has got a big foreign currency liability and absolutely nothing to show for it," said David Rees, an economist at Capital Economics in London.
Venezuela is due Wednesday to repay $1.5 billion of dollar debt, the first of two payments this month. PDVSA also has a $3 billion bond payment due on Oct. 28. The country's reserves fell by $1.8 billion on Oct. 3 to $20 billion, including about $15 billion of gold. That's the biggest decline in four years.
The Finance Ministry's press office declined to comment on Venezuela's bonds. Renny Bolivar, a corporate finance officer at PDVSA, didn't respond to two telephone calls and an e-mail message seeking comment.
Concern is deepening that Venezuela will struggle to meet debt payments as its dwindling supply of dollars triggers shortages of everything from basic medicine to deodorant, the economy shrinks and inflation soars to the highest in the world at 63.4 percent.
While Venezuela and PDVSA have borrowed more money than the gross domestic product of Uruguay in the past decade, the cash has been used to finance a surge in government spending on public works. The outlays have led Venezuela to post the biggest budget deficit in the world over the past three years as a percentage of GDP, according to the International Monetary Fund.
"The money has gone toward social engineering," Kathryn Rooney, an analyst at Bulltick Capital Markets, said by phone from in Miami. "It has gone to finance current spending. PDVSA hasn't invested adequately to increase production. It gets spent or frittered away through corruption."
Venezuela, which has the world's largest oil reserves, has $9.2 billion of debt payments, including loans from China, due this year, Francisco Rodriguez, an economist at Bank of America Corp., wrote in a Sept. 30 report. President Nicolas Maduro has $9.6 billion of liquid assets available to pay the debt as well as $30 billion of other assets, such as $15 billion of gold and $3.3 billion bonds held by the central bank, he wrote.
Rodriguez said he counted the gold himself during a recent trip to Caracas.
After this month's maturities, Venezuela has $1.68 billion of bonds due on March 16.
Jim Craige, who helps manage $65 billion of assets as a money manager at Stone Harbor Investment Partners LP, says Venezuela has plenty of overseas assets that can be seized in the event of non-payment, proving a deterrent to a default.
"The cost of default is so significant for Venezuela specifically that the cost of debt service pales into insignificance," he said. "There are 35 or 40 ships out there floating around the world every day. If you default, they are going to get attached. If you don't have access to capital markets and you don't have access to dollars, your economy would implode."
Former President Hugo Chavez imposed currency controls in January 2003, saying "savage capitalists" had tried to buy all the country's bolivars so Venezuela wouldn't have any money to buy food or medicine. A decade later, the country is awash in bolivars. Bolivar money supply swelled 99 percent in the 12 months through July. Maduro himself has more than doubled the supply of local currency since he took office in April 2013.
That's caused the bolivar to lose 59 percent of its value in the past year on the black market, leaving it at a record low 102.76 per dollar Monday, according to dolartoday.com.
"It's very clear to anyone who looks at Venezuela that its economic deterioration has accelerated in the last year or year and a half," said Colm McDonagh, who manages a $1.3 billion emerging-market debt fund at Insight Investment Management. "There seems to be a scarcity of dollars and a lack of transparency about dollar resources Venezuela has."