Venezuela Default Odds at 93% as Bonds Sink to 16-Year Low

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Swaps traders are almost certain that Venezuela will default as the rout in oil prices pressures government finances and sends bond prices to a 16-year low.

Benchmark notes due 2027 dropped to 43.75 cents on the dollar as of 11:35 a.m. in New York, the lowest since September 1998, as crude extended a bear market decline. The upfront cost of contracts to insure Venezuelan debt against non-payment for five years is at 59 percent, bringing the implied probability of default to 93 percent, the highest in the world.

This year’s 38 percent plunge in oil prices has exacerbated concern 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. Foreign Minister Rafael Ramirez, also the country’s OPEC representative, said yesterday that the government is working constantly with other members of the energy cartel to raise oil prices to $100 a barrel.

“It’s very hard to think of a new marginal buyer for Venezuelan debt,” Mohammed Grimeh, head of financial markets at Standard Chartered Plc, said by phone from New York. “The hedge funds aren’t buying it, and the dealers aren’t taking risk.”

Brent and West Texas Intermediate traded at almost the lowest price since July 2009 as Saudi Arabia questioned the need to cut output, bolstering speculation that the Organization of Petroleum Exporting Countries’s biggest producer will defend market share. WTI was little changed at $60.95 a barrel in New York trading today.

Foreign Reserves

Benchmark bonds fell 0.63 cent on the dollar today, extending the drop over the past week to 8.3 cents and pushing yields to 23 percent.

At $21.5 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. Venezuela’s Finance Ministry didn’t respond to a phone call and e-mail seeking comment.

Ramirez said in an interview on the Telesur network that Venezuela expects OPEC to hold a special meeting before June to discuss oil prices.

“Our position on OPEC is that they defend the fair price of our oil,” he said. “We don’t believe in the free market. We must make an effort to reduce overproduction.”

Venezuela, which has seen more than 1,000 of its companies nationalized since Hugo Chavez came to power 15 years ago, relies on oil for 95 percent of its export revenue. Chavez died in 2013.

Chronic Shortages

The nation is plagued by chronic shortages of everything from milk to toilet paper amid the world’s fastest inflation. The economy is expected to shrink 3 percent this year and another 1.5 percent in 2015, according to the median estimate of 15 analysts surveyed by Bloomberg.

Venezuela’s average crude price fell to $61.92 a barrel in the week ended Dec. 5, the lowest since May 2010. Barring any increases in crude output or cuts in imported goods, Venezuela will need oil to average about $97 per barrel to meet its debt obligations through 2038, Daniel Chodos, an analyst at Credit Suisse Group AG, wrote in a Nov. 19 report.

The drop in oil will cause the nation’s trade balance to fall into a deficit of 2 percent of gross domestic product next year, according to Moody’s Analytics.

That will “make the country even more reliant on scarce capital inflows to cover the deficit and maintain its ability to service foreign-currency debt,” Moody’s wrote in a Dec. 8 report. Venezuela is rated seven levels below investment grade at Caa1 by Moody’s Investors Service.

Maduro said in a televised speech Dec. 8 that credit-rating companies had imposed a “financial blockade” on Venezuela to prevent it from borrowing abroad.

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