Venezuela Bonds Fall Below 40 Cents as Maduro Affirms Subsidies

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Venezuelan bonds dropped to a 16-year low as President Nicolas Maduro said he has no plans to curb fuel subsidies while not ruling out the possibility of default.

The government’s benchmark bonds due in 2027 fell 8.2 percent to 37.835 cents on the dollar, the lowest on a closing basis since 1998, as of 4:57 p.m. in New York. The extra yield investors demand to hold Venezuela’s overseas notes instead of Treasuries rose the most in the world. Swaps contracts protecting bond investors from non-payment imply a 97 percent chance of default in the next 12 months, according to CMA data.

Maduro said in televised speeches over the weekend that he saw no need to cut the government subsidies that leave gasoline selling for 6 cents a gallon, and that he will keep a 6.3 bolivar-per-dollar fixed exchange rate for priority imports. He said there’s no possibility of default unless it was part of a strategy to bolster economic development and no such plans are in place. Oil, which makes up 95 percent of exports, fell 2.9 percent in New York to extend its drop since June to 47 percent.

“Maduro’s speech over the weekend was a problematic change of tone,” said Ray Zucaro, who helps oversee about $450 million of investments at SW Asset Management LLC. “The vice around Mr. Maduro is getting tighter and he’s running out of options. All the easy fixes remain undone.”

Venezuelan debt is the worst-performing among emerging markets this year, losing 35 percent, according to Bloomberg indexes. The bonds due 2027 have fallen 54 percent in six months.

State oil company Petroleos de Venezuela SA’s bonds due in November 2017 lost 8.5 percent to 44.48 cents on the dollar, a record low. PDVSA bonds lost investors 33.6 percent this year.

Currency Rate

The Venezuelan bolivar trades at 180.36 per dollar in the black market, according to dolartoday.com. Analysts have said Maduro could save his government money by selling fewer dollars at the 96 percent discount represented by the official rate and more of them at the 49.978 rate on the government’s legal Sicad II market.

While Venezuela pushed for an output cut at OPEC’s meeting in November, the cartel will stand by its decision not to curb production even if oil prices fall as low as $40 a barrel and will wait at least three months before considering an emergency meeting, the United Arab Emirates’ energy minister said today.

The price of Venezuelan crude fell to $57.53 per barrel last week, the lowest since 2009, the oil ministry said today.

“There is no possibility of default, unless we would decide to not pay anymore as part of an economic strategy for development,” Maduro said Dec. 13. “And that’s not the strategy that has been constructed in these years of economic thought laid out by Hugo Chavez.”

‘Immoral Blockade’

Maduro blamed the country’s high bond yields on a “vulgar, immoral blockade” by credit rating companies, egged on by “neoliberal technocrats.”

Since he took office, Venezuela has had the world’s fastest inflation and is on course to post the second-deepest budget deficit in emerging markets as he spends income he doesn’t have and prints bolivars to replace it. Among major emerging economies, only Libya will run a steeper deficit this year, according to International Monetary Fund estimates from October.

Venezuela had $21.4 billion in international reserves on Dec. 11. The government and state-owned oil company Petroleos de Venezuela SA have about $21 billion of debt to pay by the end of 2016.

“Everything he said was bad news,” Donato Guarino, a strategist at Barclays Plc, said by telephone from New York. “A lot of emerging-markets people are throwing in the towel.”

Barclays today reiterated its overweight recommendation on Venezuelan debt. The longer-dated bonds of Petroleos de Venezuela SA are trading at or below the level investors could get back in the event of default, analysts led by Guarino wrote in a note to clients.

While declining oil prices have left Venezuela in an “extremely vulnerable position,” it still has the capacity to avoid a default, they wrote.

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