WASHINGTON—Without US support, Venezuela’s post-Maduro government stands little chance of stabilizing its shattered economy. The United States is the main customer for Venezuela’s oil, US creditors hold the bulk of Venezuela’s debt, most bonds were issued under New York state law, and the White House has strong political influence over the new government. But even with US support, an economic recovery will be difficult. It’s too early, for example, to tell whether the United States has sufficient levers to initiate a successful recovery in Venezuela, and it’s unclear whether the government in Caracas is capable and willing to do what’s necessary to make a recovery stick.
What’s needed first is clear, however. Economic stabilization requires a reduction of Venezuela’s massive debt obligations, which likely exceed $150 billion and are owed to a tangled web of bondholders, arbitration claimants, Russia, and—most problematically—China. Venezuela’s debt is where the Trump administration should start, and it should do so while working with the International Monetary Fund (IMF).
A debt crisis of staggering proportions
Venezuela’s external debt represents roughly 180–200 percent of its gross domestic product, making it one of the world’s largest unresolved sovereign defaults. The $60 billion in defaulted bonds once issued by the government and the state-run oil company Petróleos de Venezuela, SA have ballooned past $100 billion as a result of accumulated interest. International arbitration awards from companies expropriated by the Chávez regime add another $20 billion. And among other creditors, China holds at least $10 billion in bilateral debt, collateralized by oil shipments that give Beijing secured creditor status and operational leverage over Venezuela’s petroleum sector.
Without addressing this debt overhang, Venezuela will find it difficult to attract the massive foreign investment needed to revive its oil production. There are differing assessments of what Venezuela can realistically service while rebuilding its economy, but substantial debt reductions will be necessary. Citigroup, for example, estimates that restoring debt sustainability requires principal haircuts of at least 50 percent. Other estimates suggest even deeper reductions—down to a 30 percent recovery value—to avoid a cycle of repeated defaults that would cause permanent economic dysfunction.
Why the IMF matters
It has been encouraging to see US Treasury Secretary Scott Bessent engage with IMF and World Bank leadership to discuss Venezuela’s economic reconstruction. Given the IMF’s expertise in resolving complicated debt situations and restoring macroeconomic stability, support by the Bretton Woods institutions will be critical.
At the same time, the IMF must be careful to preserve its independence and its legitimacy. Especially in cases of sovereign arrears, the fund needs to be seen as an impartial arbiter that adheres to its legal mandate and its rules-based framework. For example, the decision to recognize a new government in Caracas as a legitimate counterpart—which is necessary for Venezuela to negotiate access to the IMF’s financial resources—is up to the IMF’s executive board and to it alone.
What follows assumes that this prerequisite is met and that the IMF can embark on what is likely to be an extraordinarily complex restructuring effort. The fund has not conducted an economic assessment of Venezuela since late 2004, representing a twenty-one-year gap in formal relations. Moreover, the capacity of the government and central bank to implement necessary policies will need to be demonstrated, and statistical processes will likely have to be substantially rebuilt.
Nevertheless, an IMF program offers something no bilateral arrangement can provide: a multilateral framework that legitimizes deep debt restructuring and provides Venezuela with the financing and technical assistance to implement reforms. While designing a program that gives confidence that future claims on Venezuela will be honored, the IMF can bring credibility to debt sustainability analyses, work closely with diverse creditor groups, and impose program conditionality that prevents preferential treatment of powerful creditors, particularly China.
Who gets paid first?
In this regard, it is important to recognize that the large investment and economic needs of Venezuela should take precedence over short-term payouts to official or private creditors. Neither the IMF nor other creditors will be able to provide fresh funds without being assured that Venezuela has the capacity to repay such loans.
This means that creditors will likely need to agree to substantial deferments on interest and principal repayments. It will take time for creditor committees to form, however, and the negotiations will need to identify different options that ensure broad compatibility of treatment, including oil‑linked debt instruments and bond exchanges with different coupons and maturities.
The Trump administration will play an important role in this process. The administration’s stated goal of kickstarting Venezuela’s oil industry is dependent on a speedy debt resolution, which it can facilitate, for example, through executive orders that protect Venezuelan assets from litigating creditors. At the same time, the administration should avoid the impression that it uses its policy leverage and legal powers to help US creditors without ensuring comparable terms for foreign creditors, whether private or official.
The latter principle will be important for the position of China. Under traditional IMF rules, Beijing could until recently effectively veto a Venezuelan program by refusing to provide upfront restructuring commitments and, instead, engaging in multiyear negotiations that would leave the country in limbo while economic conditions deteriorate further. In this scenario, China would retain its secured position through oil-for-loan agreements while Venezuela remained shut out of multilateral support.
The strategic opening: Lending into Official Arrears
Fortunately, the IMF reformed its Lending into Official Arrears (LIOA) policy in April 2024 specifically to address coordination problems with large creditors in debt restructurings. The new mechanism allows the IMF to lend even as official bilateral creditors refuse to commit to restructuring—provided that the fund implements enhanced safeguards.
These safeguards are powerful: phased disbursements, program conditionality prohibiting preferential creditor payments, and quarterly reviews monitoring restructuring progress. Most importantly, once an IMF program is operational, Venezuela would be contractually bound not to provide official holdout creditors better treatment than bondholders and other creditors receive. The oil-for-loan arrangements that currently give Beijing privileged access to Venezuelan revenues would be explicitly prohibited under program terms.
As a result, China would have to choose between two options: It could participate constructively in restructuring on terms comparable to other creditors, or it could watch from the sidelines while Venezuela receives IMF support, stabilizes its economy, and implements rules preventing Chinese preferential treatment.
Should it be necessary to enact the new policy, Venezuela’s case would resonate well beyond the country itself. China is now the world’s largest bilateral creditor, but recent debt restructurings in Zambia, Sri Lanka, Ethiopia, and Ghana faced lengthy delays, with months or years passing from staff-level IMF agreement to financing assurances. The LIOA reforms were designed precisely to give the IMF leverage in such situations. Venezuela would become the highest-profile test yet of whether these reforms achieve their intended purpose.
Charting a path forward
The Trump administration’s best path forward is to pursue a sequenced strategy to achieve broad international buy-in while minimizing the potential for Chinese obstruction. To do this, the administration should:
First, clarify government recognition and lift sanctions. Acting President Delcy Rodríguez governs under a ninety-day mandate that lacks European Union recognition. Washington should work with other countries to establish a transitional framework—likely requiring elections—that provides the legitimacy necessary for IMF engagement.
Second, unlock Venezuela’s frozen special drawing rights (SDRs). The approximately five billion dollars in SDRs are Venezuela’s own reserves, not new lending. Releasing them provides immediate liquidity for stabilization and humanitarian assistance while IMF program negotiations proceed. If properly executed under international supervision, this would demonstrate US commitment to Venezuela’s economic recovery rather than merely extracting oil resources.
Third, coordinate creditor groups early. Representing major bondholders, the Venezuela Creditor Committee has already expressed willingness to negotiate a restructuring. The administration should facilitate such discussions to quickly establish realistic recovery expectations, including by discouraging holdout creditors.
Fourth, encourage Venezuela to formally request Chinese participation in restructuring on terms comparable to other creditors. When it does this, Caracas should give Beijing a four-week window to respond, as required under IMF policies. If China provides constructive commitments, then these should be incorporated into the program framework. But if China holds out, then the United States should direct its IMF executive director to support enhanced safeguards under the IMF’s LIOA policy, proceeding with program approval despite Chinese resistance.
Fifth, design robust program conditionality. Besides identifying appropriate macroeconomic policies, along with governance and other structural reforms, the IMF program should include strict caps on debt service payments to ensure comparability of treatment, prohibition of secured lending arrangements such as oil-for-loans, and transparent reporting on all creditor interactions. These safeguards would protect both IMF resources and the integrity of the restructuring process.
The strategic imperative
The Trump administration’s Venezuela intervention raised profound questions about US power projection in the post–Cold War era. Answering those questions requires more than military force—it requires strategic sophistication in wielding economic and institutional tools. An IMF program deploying the new LIOA mechanisms, if necessary, to ensure China’s active participation while delivering consensual and sustainable debt relief would offer precisely that opportunity. The question is whether Washington possesses the diplomatic patience and multilateral discipline to see it through.
