Tuesday, September 9, 2014

Is Venezuela next?

By Sebastian Boyd and Ye Xie

Venezuelan debt traders are beginning to consider the possibility the country may run out of money.

The cost of insuring the country’s foreign-currency bonds against non-payment soared yesterday by the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse in 2008 to 14.25 percentage points, the most expensive in the world. Investors are also demanding the biggest premium in six months to insure the South American nation’s notes over those from war- torn Ukraine.

While most analysts and investors expect Venezuela and its state-owned oil company to make $5.3 billion in bond payments coming due next month, concern is mounting the country may find itself without enough cash to service debt as soon as next year as foreign reserves drop to an 11-year low and oil prices sink. The nation’s notes tumbled yesterday after Ricardo Hausmann, a Venezuelan-born economist at Harvard University, questioned the government’s decision to keep paying bondholders in the face of shortages of everything from basic medicine to toilet paper.

“The bond market is finally beginning to wake up” to the possibility of Venezuela defaulting, David Rees, an economist at Capital Economics in London, said by phone. He predicts the country could default as soon as this year.

A spokeswoman for Venezuela’s Finance Ministry declined to comment on Hausmann’s remarks.

‘Moral Grounds’

The nation’s five-year credit-default swaps jumped 1.76 percentage points yesterday after Hausmann, a former Venezuelan planning minister who is now director of Harvard’s Center for International Development at Harvard University in Cambridge, Massachusetts, said in an interview with Bloomberg News that there were no “moral grounds” for the government to make its debt payments next month.

The comment came after he co-wrote a Sept. 5 article in Project Syndicate titled, “Should Venezuela Default?” In the piece, he and Harvard research fellow Miguel Angel Santos highlighted how billions of dollars in arrears with importers and shortages are imposing hardship on Venezuelans.

“The fact that his administration has chosen to default on 30 million Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude,” they wrote. “It is a signal of its moral bankruptcy.”

Bond Losses

Venezuela’s bonds fell 4.4 percent yesterday, pushing the extra yield investors demand to own the nation’s debt instead of U.S. Treasuries to a six-month high of 11.95 percentage points, data compiled by Bloomberg show. The country’s notes now yield 3.31 percentage points more than debt from similarly rated Ukraine.

The probability of Venezuela missing a payment on its bonds in the next five years rose four percentage points to 63 percent yesterday, according to traders in the credit-default swaps market. The cost of insuring Venezuela’s debt passed Argentina’s after that country missed a July 30 payment deadline, causing trading to be suspended.

Venezuela has handed bond investors losses of 8.5 percent since President Nicolas Maduro took office on April 19, 2013, versus an average 3.6 percent gain for emerging-market sovereign bonds, according to Bloomberg indexes. During the 14-year tenure of Maduro predecessor Hugo Chavez, Venezuelan notes returned 677 percent, beating the 387 percent average advance for developing- nation debt, data compiled by JPMorgan Chase & Co. show.

The yield on Venezuela’s bonds due in 2022 fell 0.13 percentage point today to 15.67 percent as of 11:01 a.m. in New York from a six-month high of 15.8 percent yesterday.

Oil Prices

The OPEC member’s securities have also been punished by the 10 percent drop in benchmark oil prices during the past year, according to Michael Ganske, who holds the country’s bonds in the $8 billion of emerging-market debt he oversees at Rogge Global Partners Plc in London. Crude now trades at about $94 a barrel, down from a peak of $145 in July 2008.

While Venezuela’s bonds have tumbled this month, they’re still trading above two-year lows set in February, amid violent street protests against Maduro’s government that have left 43 people dead. The country last defaulted on its foreign debt in the 1980s, when a financial crisis swept across Latin America.

Barclays Plc analysts Alejandro Arreaza and Alejandro Grisanti recommended yesterday that investors take advantage of the bond sell-off to buy, saying the country has enough money to keep making debt payments and the cost of a default “could be very high.”

The country earns about $70 billion a year from oil exports, with total debt service equal to about 25 percent of that amount.

Soaring Inflation

One of the obstacles the government could face in defaulting is that bondholders may seek to seize the assets of Citgo Petroleum Corp., the U.S. refining and distribution arm of state oil company Petroleos de Venezuela, to recoup their money.

“Citgo itself is seen as a deterrent to default because it’s a physical asset offshore to attach,” Siobhan Morden, the head of Latin American fixed-income strategy at Jefferies Group LLC, said by phone.

Petroleos de Venezuela said last month it’s looking to sell Citgo for at least $10 billion. Even that amount wouldn’t cover arrears to importers that Morgan Stanley estimated in June may be as much as $13 billion, a figure that equals more than half the country’s $21.6 billion of foreign reserves.

The increasing difficulty of finding dollars is forcing Venezuelans to the government’s official distribution depots, where they line up for subsidized goods with numbered tickets that give them the right to buy items including frozen chicken, rice and cooking oil.

Economic Data

Venezuela has delayed regular reporting of economic statistics and has yet to publish inflation data for June, July or August after annual consumer-price increases reached 61 percent in May, the highest in the world.

“The reason there’s such a serious problem in Venezuela is horrible macroeconomic policies, and that can be fixed,” said Lars Christensen, the chief emerging-market economist at Danske Bank A/S in Copenhagen. “But if Venezuela defaults today, nothing would have changed in terms of the horrible policies of the Venezuelan government.”

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