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Venezuela’s economic collapse owes a debt to China (LINK)
It is hard to exaggerate the magnitude of the Venezuelan collapse. People are queueing for hours to buy food, stores are empty, and the country is in a deep recession. Venezuela has the fastest inflation in the world, while its government debt is the most expensive to insure against default.
How did we get here? Venezuela used the period of high oil prices to quadruple its public foreign debt, in order to fuel a domestic spending boom. By 2012, when Venezuelan oil averaged $103, the country was spending as if the price was $194, running up a fiscal deficit of 17.5 per cent of gross domestic product. That is why the economy went into crisis in early 2014, when the oil price was still $100. The recent drop has just made a hopeless situation worse. Who gave the country the rope with which to hang itself? Mostly China.
China started to lend massively to Venezuela in 2007. Since then it has lent more than $45bn, of which about $20bn is still outstanding. After a visit to Beijing on January 8, President Nicolás Maduro said he had won further “investment”.
What makes China unusual is not just the amount it is willing to lend but the way it lends. First, Beijing has chosen to be opaque: we know neither the terms of the loans nor the uses of the money. The debt is repaid in oil, making Wall Street bondholders junior to China.