Venezuela Bondholders Dismiss Maduro as Default Looms

Eight days after President Nicolas Maduro vowed to unleash a “counter offensive” to revive Venezuela’s economy, he’s yet to unveil any new measures. For bondholders, it’s just one more example of how his tough talk is seldom followed by actions.

The nation’s sovereign notes lost 13.8 percent in the week after the televised speech on Dec. 30, the most in developing countries, as a plummet in oil price deepens concern the government will renege on its obligations. Venezuela and its state oil company have $68 billion of dollar bonds outstanding and they trade at $30 billion.

With the economy crippled by the world’s fastest inflation, shortages of basic goods and dwindling foreign reserves, Maduro has shied away from devaluing the bolivar or raising gasoline prices, politically unpopular measures that would boost the nation’s finances. The price of Venezuela’s oil, which accounts for 95 percent of export revenue, has fallen to a five-year low of $47.05 a barrel, 16 percent below the level Jefferies Group LLC says is needed to avoid a default.

“Making announcements that just say that there will be announcements is quixotic at a time like this,” Jorge Piedrahita, the chief executive officer of Torino Capital LLC in New York, said in an e-mailed message. “Maduro is showing little leadership.”

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The Finance Ministry’s press office didn’t respond to an e-mail or two telephone calls seeking comment on the timing of the policy announcements and the decline in the nation’s bonds.

Venezuela’s bonds climbed the most in three weeks today. The benchmark bonds due in 2027 rose 2.19 cents on the dollar to 43.635 cents as of 11:23 a.m. in New York.

Finance Minister Rodolfo Marco Torres said Jan. 6 the government will provide more details on changes to the foreign-exchange system when Maduro returns from a trip to countries including China, Iran and other oil producers.

“Sometimes there’s an international conspiracy to try making Venezuela look like it’s bankrupt,” Maduro said yesterday in Beijing. “Venezuela has its own economic power, with a productive people, with gigantic economic potential, with the largest oil reserves in the world.”

The 52 percent decline in the price for Venezuela’s crude since June has added to pressure on Maduro to devalue the country’s currency, which would give the government more bolivars for each dollar of export revenue from the state oil producer and narrow its price gap in the black market, where the local currency is 96 percent cheaper, according to dolartoday.com.

Inflation Accelerates

The country could face four-digit inflation as early as this year if the bolivar isn’t weakened, Bank of America Corp. economist Francisco Rodriguez said Dec. 28. Consumer prices rose 63.6 percent in the 12 months through November.

Gasoline in Venezuela costs 4 cents a gallon, making it the cheapest in the world.

“The size of the oil shock requires a huge policy response,” Siobhan Morden, the head of Latin American fixed-income strategy at Jefferies, said by telephone from New York. “We want to see the the same three things we have always wanted to see: data transparency, higher gasoline prices and devaluation. He isn’t committing to any of those.”

At $22 billion, Venezuela’s foreign reserves cover two years of overseas debt payments for the government and state oil company Petroleos de Venezuela SA, known as PDVSA. Research company Eurasia Group estimates that less than $2 billion of that can be readily deployed to pay debt. Much of its reserves are in the form of gold.

Yields Jump

Venezuela’s bonds due 2027 have dropped 6.625 cents since Dec. 30 to 41.375 cents on the dollar, pushing yields to 24.31 percent, data compiled by Bloomberg show.

Michael Ganske, who oversees $8 billion as head of emerging markets at Rogge Global Partners Plc, said he’s buying Venezuela bonds because Maduro, who took office in April 2013 following the death of then President Hugo Chavez, will continue to honor Venezuelan debt because the cost to an oil exporting country of a debt default would outweigh the savings.

“Obviously that’s a risky strategy,” Ganske said by telephone from London. “Maduro is not a very competent leader and lacks the charisma that Chavez had, but he is doing the right thing. It’s not rational for them to default.”

Maduro is reluctant to devalue the currency and boost gasoline prices because the measures would be politically unpopular, according to Diego Moya-Ocampos, an analyst at political risk consultancy IHS Inc.

The country’s economic slide triggered street protests against Maduro last year that left 43 people dead.

“He knows there’s a risk of increased protests and social unrest that could threaten political stability,” Moya-Ocampos said by telephone from London. “Maduro has inherited an economic system that’s not sustainable when oil prices are flat or declining and he lacks the political capital to change it. The more he delays taking decisions, the more painful it will be.”

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