Legislative elections were held on December 6, and a combination of triple-digit inflation, severe shortages of numerous staple goods, and repression of government critics has stoked discontent among the general electorate that cost the incumbent PSUV dearly at the ballot box. The opposition MUD won a landslide victory, securing a two-thirds majority in the 167-member National Assembly, a surprisingly strong showing that creates a basis for reversing the socialist “Bolivarian revolution” initiated by President Hugo Chávez in 1999.

President Nicolás Maduro initially stated that he accepted the verdict of voters, but he quickly adopted a less conciliatory posture after the official results were made public, and a power struggle is taking shape. Lawmakers have rejected the president’s request for emergency powers that would enable him to implement policies without congressional approval for 60 days, but Maduro insists that he does not require legislative assent. Meanwhile, the opposition has defied a court order to delay seating three lawmakers whose election victories have been challenged by the PSUV, a move aimed at ensuring the two-thirds majority required to replace key government personnel, including the members of the top court.

In effect, the constitution has already been suspended, setting the stage for a power struggle that will be decided not by the rule of law, but by which political force is strongest. Under the circumstances, a key question moving forward is whether the most ardent supporters of Chavez’s “Bolivarian revolution” within the military, the government bureaucracy, and Venezuela’s slums will allow the MUD to win the institutional turf war without a fight that, if engaged, could easily descend into deadly violence.

The political drama will play out against a backdrop of steadily worsening economic conditions. With oil prices taking another tumble in early 2016, the government is edging ever-closer to a debt default, the risk of which is heightened by the rapid depletion of the central bank’s supply of foreign currency. Maduro’s emergency declaration was accompanied by the release of official economic data for the first time in nearly two years, which revealed that foreign-exchange reserves fell from around $20 billion at the end of the third quarter of 2015 to just $14 billion by the end of November.

Total assets, including loans obtained from China, amount to just $24 billion, compared to the estimated $30 billion that the government will need to fill its financing gap in the current year.
In short, the government in Caracas will go bankrupt unless it figures out some way to raise a lot of cash very quickly. That should concern foreign-owned businesses, which will be among the first targets to be squeezed by a desperate government. Indeed, there are reports that several foreign investors are scrambling to cut their losses before the bottom drops out.

A default by Venezuela would be the second-largest in history, exceeded only by that of Argentina in 2001. But unlike Argentina, which recovered quickly from the collapse and had attained sufficient strength by 2003 to wrest significant concessions from its creditors, Venezuela will have no basis for powering a recovery in the absence of either a recovery in oil prices or emergency financing from the international community. There is little to indicate that help from former source might come anytime soon, and the latter option will be a non-starter as long as Chávism remains the guiding principle for domestic economic policy.