Venezuela Missing Ukraine’s Ace-in-the-Hole Allies

Venezuelan President Nicolas Maduro is learning that allies matter in the bond market.

Protests against shortages of basic goods, rising crime and the world’s fastest inflation that have left more than a dozen dead this month are threatening Maduro’s grip on power and caused borrowing costs to soar to the highest in the developing world. The likelihood Venezuela will repudiate its debt within five years reached 65 percent in the swaps market, higher than even for Ukraine, which is trying to fend off a default after President Viktor Yanukovych was ousted last week.

The disparity underscores just how precarious Venezuela’s economy has become as Maduro pursues policies to further Hugo Chavez’s brand of socialism, which has left the nation dependent on diminishing oil exports for hard currency. While Ukraine’s bonds rallied as donors including the International Monetary Fund, the U.S. and the European Union said they’re prepared to provide financial support to the new administration, Maduro has accused his opponents of banding with the U.S. to destabilize his government.

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“Both countries run a serious risk of defaulting,” said Lars Christensen, chief emerging-market analyst at Danske Bank A/S in Copenhagen. “The question is whether you have someone to bail you out. Venezuela just doesn’t have any friends.”

Venezuela, which has never defaulted on the international bonds, differs from Ukraine because it has the world’s largest oil reserves, according to a Finance Ministry official who asked not to be identified, citing government policy. The extent of the protests had been exaggerated by the media, the official said.

IMF Support

It costs 5.4 percentage points more to protect holders of Venezuela’s debt against non-payment than those of Ukraine bonds using credit-default swaps. Yesterday the spread reached 6 percentage points, the most since September 2011 and double the premium three months ago.

While Venezuela’s notes jumped yesterday after the nation moved to allow more dollar sales to mitigate record shortages of everything from medicine to food, the yield that investors demand to hold its debt has almost doubled over the past year to 15.2 percent. That’s higher than all 55 emerging markets tracked by Bloomberg.

The yield investors demand to buy Ukraine’s dollar bonds due in 2023 fell 0.93 percentage point to 9.26 percent yesterday on expectations that Yanukovych’s ouster will help the country negotiate a new bailout. It rose 0.42 percentage point today to 9.68 percent as of 2 p.m. in New York. The yield climbed as high as 11.37 percent on Feb. 19 amid unrest that left at least 82 people dead.

Ukraine Backing

The IMF is ready to help Ukraine “from an economic point of view,” Managing Director Christine Lagarde said Feb. 23. Treasury Secretary Jacob J. Lew also said the U.S. stands ready to assist the nation as it implements reforms.

The first delivery of Western aid to the country will probably happen next week, following the formation of a new government, Elmar Brok, the head of European Parliament’s foreign affairs committee, said in Kiev yesterday.

Ukraine’s Parliament speaker Oleksandr Turchynov, who was handed presidential powers following Yanukovych’s removal, warned that the country’s economy was “spinning out of control” in a “pre-default situation.” Standard & Poor’s cut Ukraine’s credit rating to CCC on Feb. 21, eight levels below investment grade and two steps below Venezuela.

Ukraine is facing $17 billion of liabilities, excluding interest, maturing through the end of 2015, with $1 billion of bonds due in June, data compiled by Bloomberg show.

Venezuela has $1.5 billion of dollar bonds due this year.

Default Odds

Credit-default swaps imply the probability of a Venezuelan default is 65 percent, versus 50 percent for Ukraine.

While China has lent Venezuela more than $42 billion since 2007, the Asian nation is unlikely to come to Maduro’s aid, according to Diego Moya-Ocampos, an analyst at IHS Global Insight Inc. In September, Maduro agreed to borrow $5 billion from China for an investment fund that will finance Chinese joint ventures in the Orinoco oil fields and Venezuela’s biggest gold deposit.

“China won’t put in another cent,” Moya-Ocampos, who spent the last two weeks in Caracas and met with protesters, said in a telephone interview. “The last loan had lots of conditions because they have to make sure the money is used responsibly. No one’s going to bail out Venezuela.”

‘Exceptionally High’

Calls to China’s Ministry of Finance after business hours went unanswered.

Cathy Hepworth, a portfolio manager at Prudential Financial Inc., said Venezuela will continue servicing its debt.

“The willingness to pay is exceptionally high,” she said in a telephone interview from Newark, New Jersey. “They absolutely need to be able to issue debt to get the dollars they need to run the country and import food. Petroleos de Venezuela SA needs to be able to borrow. Venezuela doesn’t have a choice. They have to pay the bonds.”

Venezuela said yesterday that the state oil producer known as PDVSA, companies and individuals can buy and sell dollars in a regulated market. Bank of America Corp. today recommended investors buy Venezuelan debt because the new rules on dollar sales could lead to a currency devaluation.

Venezuela holds the world’s biggest oil reserves, which it uses to obtain most of the dollars that it pays bondholders. The country’s foreign-exchange reserves, excluding gold, fell to $5.7 billion in November, close to an almost 20-year low, according to IMF data.

Opposition Leader

The extra yield investors demand to own Venezuelan bonds instead of Treasuries fell 0.39 percentage point yesterday to 12.8 percentage points on the new rules for dollar sales, according to Bloomberg’s USD Emerging-Market Sovereigns Index. (BEMS) The yield on the 9.25 percent bonds due in 2027 fell 0.49 percentage point today to 14.37 percent.

Protesters blocked streets in Caracas yesterday and opposition leader Henrique Capriles pulled out of talks after the death toll rose to 13. Protests have turned violent since opposition leader Leopoldo Lopez, who has been detained, called Feb. 12 for people to take to the streets to speak out against rising crime, the world’s fastest inflation and shortages.

The protests don’t pose a serious threat to the government’s grip on power, Bank of America said today in an e-mailed note to clients. Maduro has called his rivals fascists, accused them of sabotaging the economy and banding with the U.S. to destabilize the country.

“Macroeconomically, Venezuela is even more of a basket case than Ukraine,” Danske Bank’s Christensen said. “While the Venezuelan situation could easily be resolved by the government making the right decisions, you obviously have a very incompetent government in Venezuela.”

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net

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