Venezuela Default Countdown Begins: After Selling Billions In Gold, Caracas Raids $467 Million In IMF Reserves

Protesters, holding a mock vulture, rally against layoffs in front of the factory of U.S. automotive supplier Lear on the outskirts of Buenos Aires July 30, 2014. The protesters were also demonstrating against holdout investors locked in a legal battle with Argentina that could trigger a debt default by the country this week. Argentina has until late Wednesday to either pay out or reach a deal with the hedge funds that are suing for full payment on their bonds to avert a second default in little over a decade in Latin America's No. 3 economy. REUTERS/Enrique Marcarian (ARGENTINA - Tags: TRANSPORT CIVIL UNREST BUSINESS EMPLOYMENT POLITICS)

In late October, when describing Venezuela’s desperate steps to keep itself afloat for a few more months,we reported that in order to fund $3.5 billion bond payments in early November, Maduro’s government had engaged in something that is the very definition of insanity: selling the country’s sovereign (and pateiently repatriated by his deceased predecessor) gold to repay creditors.

Specifically, in the past several months, Caracas has quietly parted with 19% of its gold holdings:“Central bank financial statements posted this week on its website show monetary gold totaled 91.41 billion bolivars in January and 74.14 billion bolivars in May. At the strongest official exchange rate of 6.3 bolivars per U.S. dollar, which the bank uses for its financial statements, that decline would be equivalent to $2.74 billion.”

But while ridiculous, Venezuela’s decision to liquidate some of its gold is perhaps understandable under the circumstances: Venezulea relies on crude oil for 95% of its export revenue, and with prices refusing to rebound, the only question is when do all those CDS which price in a Venezuela default finally get paid.

What is even more understandable is what Venezuela should have done in the first place before dumping a fifth of its gold, but got to do eventually, namely raiding all of the IMF capital held under its name in a special SDR reserve account.

Recall that this is precisely what Greece did in July when everyone was speculating when it would default. Now its Venezuela’s turn.

The details: Reuters reports that Venezuela withdrew some $467 million from an IMF holding account in October, according to information posted on the fund’s web-site, as the OPEC nation seeks to improve the liquidity of its reserves amid low oil prices and a severe recession.

Venezuela holds part of its reserves with the International Monetary Fund in an instrument called Special Drawing Rights (SDR), a basket of international currencies made up of the euro, Japanese yen, pound sterling and U.S. dollar.

The withdrawal will allow Venezuela to use the funds for imports or debt service, but does not change its total reserve holdings as SDRs are already accounted for.

Needless to say, it is far wiser to use up all paper “assets” to repay “paper” liabilities, before resorting to hart money. By then, it is usually game over anyway, so our advise to Mr. Maduro: just default now, and save your gold.

Referentially, the country’s international reserves as of Thursday stood at $14.819 billion: and dropping fast. At this rate of depletion, we give Venezuela a few more months before the army takes over.

Finally, the central bank’s most recent financial statements as of May, showed that 58% of reserves were held in gold. It is unclear how much, if any, were held in “toilet paper”.