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Bloomberg Article Summary - Jpmorgan Is Thrust into the Middle of Venezuela’s Debt Dispute, Bn

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MEMORANDUM TO: Professor Ivanov

FROM: Danni Zhou and Nicholas Hernandez

DATE: February 14, 2019

SUBJECT: Bloomberg Article Summary

REFERENCE: Bartenstein, Laya, Vasquez, Feb. 7, 2019, JPMorgan Is Thrust Into The Middle of Venezuela’s Debt Dispute, BN

Following fresh U.S. sanctions being slapped onto Venezuela, JPMorgan Chase & Co. has found itself caught in a struggle for power. The problem that JP Morgan is facing has to deal with the bank’s bond indexes, the industry standard in measuring emerging-market performance. The U.S. sanctions issued a ban on the purchase of both debt issued by the country’s biggest oil producer and debt issued by the country’s government. Typically, a freeze in trading defaulted debt would cause JPMorgan to pull the notes from the index.

Nicolas Maduro, the current Venezuelan President, is feeling the pressure from these U.S. sanctions as they are trying to remove him from power. Bondholders and Venezuelan politicians aligned with Juan Guaido, the U.S.-backed lawmaker trying to replace Maduro, are pushing for JPMorgan to keep the debt in the index.

Ultimately, this would mean that creditors would have to dump their securities at extremely low prices. This is a bit more complicated for Venezuelan politicians. The concern is that hedge funds would end up buying these debts if they were unloaded by ETFs, mutual funds and other investors. If hedge funds were to snatch up all of the bonds, it would make it difficult for the Venezuelan government to impose a haircut on creditors which would help stabilize the country’s economy.

Venezuela wants to avoid a messy debt restructuring that could result in a major economic setback much like the one that Argentina had in 2001. Some London-based hedge funds have gained interest in the Venezuelan debt that may soon become very cheap.

Carlos Paparoni, the opposition lawmaker and current president of congressional finance commission, already had conversations with JPMorgan and said that they will try to make a friendly and rapid restructuring. If Venezuela is bounced from the index, some creditors such as Greylock Capital and Goldman Sachs Group Inc. are required to sell at a steep discount. According to the data, the benchmark notes due in 2027 last traded at about 33 cents on the dollar. JPMorgan has rejected to comment but they did confirm that they are reviewing the inclusion of Venezuela in the index.

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