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Trouble in Venezuela: RBS cuts a $4.3 billion line of credit

Posted October 17, 2008

The credit crunch is hitting everybody. Compared to countries like Venezuela, the United States is getting off easy. Hugo Chavez is finally getting what he had coming to him.

By Andrew Snyder

Baltimore – (TFN): The old cliché that a falling tide lowers all ships is more popular than ever. But it is also truer than ever. Just ask Hugo Chavez.

The Royal Bank of Scotland (RBS) just announced that it has cut its $4.3 billion line of credit to Venezuela’s state-owned oil company, Petroleos de Venezuela (PDVSA). It is a serious blow to a country that is watching its oil revenues take a serious hit as the price of crude plunges.

I could not be happier about the news.

Hugo Chavez is not smiling, though. He has been spending his country’s oil money like he could pump it out of the ground forever. The country has been busy spending huge amounts of money on expensive social programs and infrastructure improvements.

But now, Venezuela may have to re-think those plans.

Aw, shucks…

Just this week, Chavez announced his government created its budget based on oil selling for $60 per barrel. It is a smart decision with a barrel getting just over $70 right now and Venezuela’s sub-par oil trading for about $10 less per barrel.

What the country did not figure, however, was a significant cut to the amount of money the government could borrow or how much more expensive that money would be.

Right now, the government’s bond debt is dropping in value, with some yields of over 15%. Thanks to today’s news, that figure will likely go even higher. That means if the country wants to borrow money, it will have to do it at a significant premium because fewer folks are willing to purchase its bonds.

RBS must have seen something it did not like (perhaps, insane levels of spending) in the government’s 2009 spending plan.

Chavez claims to have tens of billions of dollars in emergency reserves, so his oil company may not need the line of credit, but banks usually do not eliminate the credit of folks they know can pay it back. Banks cut credit to the folks that are about to get themselves into financial trouble. My bet is Venezuela has serious pain ahead.

With oil prices dropping and the global economy slowing, Chavez’s high-flying days may be over.

I cannot wait to see this socialist America-hater get what he deserves.