Biggest Chance of Default Seen in Venezuela as Bonds Hit ’98 Low

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Traders are almost certain that Venezuela will teeter into default as bonds plunge to a 16-year low and the cost of default protection soars to a record.

Benchmark dollar notes due 2027 fell 2.71 cents on the dollar to 43.95 cents, the lowest since September 1998, according to data compiled by Bloomberg. The upfront cost of five-year credit-default swaps jumped 2.8 percentage points at 3 p.m. in New York to 59.42 percent, pushing the implied probability of default over that time span to 93 percent, the highest in the world.

The 38 percent plunge in oil this year has exacerbated concerns that Venezuela is running out of dollars needed to pay debt, pushing bond prices to levels investors haven’t seen since the 1998 Russian financial crisis spurred a selloff in emerging markets. At $21.4 billion, the nation’s reserves are at their lowest levels in a decade and cover only about 40 percent of total debt due over the next five years.

“It’s a perfect storm,” Ray Zucaro, who helps oversee about $450 million at SW Asset Management LLC, said in a telephone interview from Miami. “The bus is going downhill and it doesn’t have brakes now.”

Brent fell below $65 a barrel for the first time in more than five years today as OPEC cut the demand forecast for its crude oil to a 12-year low. Futures in London declined as much as 4.9 percent to $63.56, almost half of its 2014 peak.

Bonds from other exporting nations also slumped. Ecuador’s $2 billion of notes due in 2024 sank 3.19 cents to 90.82 cents on the dollar, the lowest since the securities were sold in June. Kazakhstan’s $1.5 billion of notes due 2024 fell to a record low.

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