Tags: Venezuela | Debt | Default | Bond Prices

Fears of Venezuela Debt Default Rise as Bond Prices Plunge

Fears of Venezuela Debt Default Rise as Bond Prices Plunge

By    |   Saturday, 23 January 2016 04:01 PM


Economists reportedly warn that a debt default by Venezuela is “practically inevitable” as prices for oil and the nation’s bonds continue to plunge.

“Venezuela is running out of runway and falling oil prices are quickly shortening the tarmac,” Russ Dallen, who heads investment bank, Latinvest, told the Financial Times.

An economic crisis sparked by the falling oil price has led to a political crisis in Venezuela. Socialist leader Nicolas Maduro is in a standoff with the center-right opposition, which has won control of the legislature.

Venezuela has the world's biggest known crude reserves but the price of oil has slumped over the past year and a half, slashing its revenues. On Friday, Venezuela's oil price fell to $21.50 a barrel. In mid-2014 in contrast, world prices were over $100 a barrel.

Venezuela has called on fellow members of the OPEC major oil producers' group to hold an extraordinary meeting in February to discuss reining in prices.

"Crude oil accounts for 96 percent of export revenues and falling prices, coupled with years of mismanagement, have crushed the country’s economy," the FT explained.

"A sell-off in sovereign bonds has pushed the price on benchmark 2026 debt to 37 cents in the dollar, a level considered a precursor to default. The cost of insuring Venezuelan bonds has tripled in the past 12 months," the FT explained.

With about $10 billion in foreign debt due during 2016, markets are jittery about a possible default, particularly at the back end of the year when the heaviest payments are due, Reuters reported.

Underlining the grave situation in Venezuela, where a plunge in oil prices has compounded dysfunctional policies, the International Monetary Fund forecast an 8 percent drop in gross domestic product and 720 percent inflation this year.

The IMF said "policy distortions" have combined with the oil price drop to create an expected 18 percent economic contraction over 2015 and 2016, the third-sharpest in the world. Prices rose 275 percent in 2015, the highest rate in the world, it added.

If the country does default, there are fears that it may face an Argentina-style fight with holdout investors due to the structure of its debt. Analysts at Bank of America Merrill Lynch estimate that the recovery value on Venezuela’s $123 billion of external debt could be as low as 21 percent if current low oil prices persist.

So far, Venezuela has managed to meet its debt obligations by swapping part of its chunky gold reserves. The government should be able to make payments due in February using available assets, say credit analysts at Barclays.

Meanwhile, Venezuela's opposition refused on Friday to approve President Nicolas Maduro's "economic emergency" decree in Congress, saying it offered no solutions for the OPEC member-nation's increasingly disastrous recession.

Few investors doubt Venezuela’s willingness to pay. In recent years, it has paid bondholders partly by drastically reducing the amount of dollars it uses to import goods, adding to widespread shortages. What’s increasingly in doubt, however, is the country’s ability to pay, The Wall Street Journal reported.

“Venezuela is in an economic hole; the oil prices are just aggravating the mess,” said Anders Faergemann, who manages $20 billion of emerging-market fixed-income debt, including Venezuela’s, at Pinebridge Investments in London.

Oil futures signal the price will remain at about $32 a barrel for the foreseeable future. That’s a far cry from the $100-plus levels that Venezuela enjoyed for years.

The cost of insuring Venezuelan sovereign debt has jumped in recent months, signaling a growing fear of default. It’s currently 63 percentage points above the cost of insuring benchmark U.S. Treasurys, up from 35 percentage points at the end of November. That means investors are pricing in a roughly 80% chance of default in the next year.

A default in 2016 “is becoming increasingly difficult to avoid,” said Barclays economist Alejandro Arreaza in a report on Venezuela this week.

If oil stays at $32 per barrel, Arreaza estimated that Venezuela will need to use 90% of its oil income this year just to meet its obligations, including sovereign debt and money owed to China.

(Newsmax wire services contributed to this report).

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Economists reportedly warn that a debt default by Venezuela is "practically inevitable" as prices for oil and the nation's bonds continues to plunge.
Venezuela, Debt, Default, Bond Prices
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2016-01-23
Saturday, 23 January 2016 04:01 PM
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