Venezuela Bonds Fall as Harvard Team Says Default Likely

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Carmen Reinhart
Venezuela should default on its foreign debt as a shortage of dollars makes it impossible for the government to meet its citizens’ basic needs, Harvard University economists Carmen Reinhart and Kenneth Rogoff said. Photographer: Jin Lee/Bloomberg

Venezuela’s bonds declined to a three-year low after oil fell and Harvard University economists Carmen Reinhart and Kenneth Rogoff said the South American country will probably default on its foreign debt.

The price on the country’s benchmark dollar bonds due 2027 tumbled 2.4 cents to 62.17 cents on the dollar at 1:45 p.m. in New York, the lowest level since October 2011. Yields climbed 0.63 percentage point to 16.37 percent.

Borrowing costs are surging as oil prices fall and a shortage of dollars makes it harder for the government to meet its citizens’ basic needs. The economy is so badly managed that per-capita gross domestic product is 2 percent below 1970 levels, the professors wrote in a column published yesterday by Project Syndicate. A decade of currency controls has made dollars scarce in the country with the world’s biggest oil reserves, causing shortages of everything from deodorant to airplane tickets.

“They have extensive domestic defaults and an economy that is really imploding,” Reinhart said in a telephone interview from Cambridge, Massachusetts. “What they really need to do is get their house in order. If an external default would trigger such a possibility, that’s not a bad thing.”

The suggestion that the country stop servicing its bonds comes a month after Harvard colleagues Ricardo Hausmann and Miguel Angel Santos wrote that Venezuela should consider defaulting given that it was piling up arrears to importers. Venezuela owes about $21 billion to domestic companies and airlines, according to Caracas-based consultancy Ecoanalitica.

Riskiest Debt

“People are beginning to see that a sensible strategy for the government is to default,” Joaquin Almeyra, a Miami-based bond trader at Bulltick Capital Markets, said in an e-mailed response to questions. “And oil below $90 complicates things.”

Futures on Brent crude fell as much as 3.1 percent to $86.17 a barrel, the lowest level in almost four years, as the International Energy Agency said oil demand will expand this year at the slowest pace since 2009. Oil provides 97 percent of Venezuela’s dollar earnings, according to the central bank.

Venezuelan debt is the riskiest in the world, yielding 16.07 percentage points more than Treasuries, according to data compiled by JPMorgan Chase & Co. The cost to insure the country’s bonds against default with credit-default swaps is also the highest for any government globally.

“Given that the government is defaulting in numerous ways on its domestic residents already, the historical cross-country probability of an external default is close to” 100 percent, Reinhart and Rogoff wrote in their article.

‘Hit Man’

President Nicolas Maduro dubbed Hausmann a “financial hit man” and “outlaw” and instructed the attorney general and public prosecutor to take “actions” against the Venezuelan-born professor for seeking to destabilize the country.

For Venezuela to recover, Maduro must unwind policies that have fueled annual inflation of 63 percent and eroded wages, Reinhart said. The poverty rate has risen since Maduro came to power 18 months ago, climbing to 32 percent at the end of last year from a record low 25 percent in 2012, according to the National Statistics Institute.

“They’re paying no one,” Reinhart said. “At those levels, inflation is certainly expropriation.”

Discontent over rising prices, soaring crime and mounting shortages sparked nationwide protests in February that were put down by soldiers and police. Forty-three people were killed in clashes, according to the public prosecutor’s office.

Making Payment

Venezuela paid back $1.5 billion of debt that matured Oct. 8. It dipped into its international reserves, pushing them to an 11-year low of $19.8 billion. The payment didn’t end the decline in the country’s bonds, which have lost 22 percent in the past three months.

State-owned oil company Petroleos de Venezuela SA is due to repay $3 billion of bonds maturing on Oct. 28. It has already bought back 60 percent of the debt, a company official said Oct. 10. The company said in an e-mailed statement Oct. 11. that it will also pay interest on bonds due in 2017, 2027 and 2037 today.

There is little risk of an immediate default in Venezuela, Sebastian Briozzo, director of sovereign ratings at Standard & Poor’s, said today in an interview at Bloomberg headquarters in New York. Last month, the ratings company lowered Venezuela’s credit rating to CCC+, which implies at least a 50 percent chance of default over the next two years.

“Once we get closer to the end of next year, the situation could become more difficult,” Briozzo said. The government is prioritizing debt payments because it needs foreign investment to expand oil production, he said.

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