Venezuela Bonds Sink Most in Two Months After Maduro Wins

Venezuela’s bonds tumbled the most in two months and the nation’s default risk rose as opposition parties challenged the election victory of ex-President Hugo Chavez’s handpicked successor, Nicolas Maduro.

Government dollar bonds due 2027 plunged 2.6 cents to 98.11 cents on the dollar, the biggest drop since February 12, boosting the yield to 9.49 percent at 4:41 p.m. in New York on concern the opposition’s challenge to the smallest margin of victory in four decades may create instability.

Maduro, who became acting president following Chavez’s death March 5, beat Henrique Capriles by less than 2 percentage points on a campaign to deepen his mentor’s 14-year socialist campaign. Capriles, the 40-year-old governor of Miranda state who according to a Datanalisis poll would lose by 10 percentage points, said he wouldn’t accept the results until officials held a recount. The process may take as long as two weeks, according to the electoral council.

“This is a scenario where you have a lot of instability in the short term, with the opposition going for the recount of the votes,” Alejandro Arreaza, an analyst at Barclays Plc in New York, said in a telephone interview.

Maduro, who served as foreign minister and vice president under Chavez, takes over an economy with the highest inflation rate in the Americas after a February currency devaluation and food shortages triggered by government-set price controls.

Victory Margin

Maduro received 50.7 percent of the votes, versus 49.1 percent for Capriles. The margin of victory was the narrowest since the 1968 presidential election.

“We had a fair and constitutional victory,” Maduro said in a speech after the results were announced. “This is another victory, an homage to our Comandante Hugo Chavez.”

Maduro said he had a 15-minute conversation with Capriles, who proposed they hold off on releasing the results until the recount was done. Maduro said he told Capriles that while he disagreed with that plan, he supported a recount.

National Assembly President Diosdado Cabello said today the country will not recount the election vote by vote, while Interior Minister Nestor Reverol told reporters the country’s military is dispatching tanks and anti-riot forces in Caracas.

The opposition has evidence of irregularities that affected hundreds of thousands of votes, Capriles told reporters less than an hour after the official result was announced. A recount is necessary to avoid protests, he said today, calling on supporters to march tomorrow asking for a recount.

While Maduro’s supporters celebrated by setting off fireworks in Caracas, Cabello posted on his Twitter account that the government needs to engage in “profound self-criticism” following such a narrow margin.

The selloff in Venezuela may be limited as the narrow vote margin signals Maduro might have to be more moderate, according to Claudia Calich, who oversees $3.1 billion in emerging-market debt as a senior portfolio manager at Invesco Advisers Inc.

‘50 Percent’

“If the results at the recount don’t reveal any major fraud, then that could be a midterm positive if this result would then narrow a bit the freedom for Maduro’s policy,” Calich said in an interview in London. “He may have to appease now 50 percent of the country who did not vote for him.”

The cost to insure Venezuelan debt against default for five years with credit-default swaps jumped 41 basis points, or 0.41 percentage point, to 731 basis points, according to data compiled by Bloomberg. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

“The election was a lot tighter than most observers were expecting,” said Risa Grais-Targow, an analyst at political risk consultancy Eurasia Group Ltd. in New York. “The fact that he won by a narrow margin is going to make it very difficult for him pretty quickly, just because he’s not starting his term in a position with a lot of power.”

Bond Losses

Venezuela’s bonds were last month’s worst performers in Latin America, with losses at 2.7 percent. They had gained 2.1 percent this month, according to data compiled by JPMorgan.

With the narrow margin of victory, Maduro will be starting his term with a weaker mandate than his predecessor and a country facing significant challenges including low growth and a shortage of dollars, according to Lars Krabbe, who manages about $3 billion in emerging-market debt as a senior portfolio manager at BankInvest Asset Management in Copenhagen.

Chavez nationalized more than 1,000 companies or their assets, imposed currency controls and used revenue from the state-run oil monopoly to fund spending on health and food for the poor as part of what he called his socialist revolution.

“There are a lot of big leftover challenges from the Chavez era,” Krabbe said by e-mail.

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