Venezuela’s Inflation Nightmare Signals Default May Come Sooner

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Venezuela is about to earn another ignominious distinction.

Long home to the world’s highest inflation rate, the country now is set to become the site of the 57th hyperinflation event in modern recorded history, says Steve Hanke, professor of applied economics at Johns Hopkins University. While the feat may be little more than a formality in a country where Hanke calculates annual cost-of-living increases already run at 772 percent, it’s the latest sign a debt default may be closer than traders previously thought.

With Venezuela’s currency losing 32 percent of its value in the past month in the black market, according to, and falling oil prices throttling the cash-starved nation’s biggest revenue source, the government may run out of money to pay its debts by year-end, according to Societe Generale SA. Derivatives traders have ratcheted up the probability of a default within one year to 63 percent, compared with 33 percent just two months ago.

“They’re very close to hyperinflation,” Hanke, who wrote a book on hyperinflation in Zimbabwe, said by phone from Baltimore. “When you have a domestic currency that is withering on the vine, it becomes more problematic servicing foreign debt.”

The currency fell so fast on Monday that it implied a monthly inflation rate of 53.98 percent. A full month of days on which the implied monthly rate was faster than 50 percent would meet his definition for hyperinflation.

‘Collapsing Economy’

Venezuela last published its consumer price index in February, when the government said annual inflation had reached 68.5 percent in December. It hasn’t published price data since. Data compiled by the teachers’ union show that food prices rose 29.7 percent in June from May and 168 percent from a year earlier, according to El Nacional.

A press official at the finance ministry declined to comment on inflation and the black market, where Venezuelans turn to get access to dollars. The largest-denomination note available in the country is now worth just 16 cents.

“It’s a collapsing economy with a massive shortage of dollars, and these guys are printing as much money as they can to survive,” Regis Chatellier, a strategist at Societe Generale, said by telephone from London. “At these levels, the shortage of dollars is such that it will be difficult for them to pay debt coming due at the end of this year. The risk of default is increasing substantially.”

‘Just Beginning’

Venezuelan bonds have lost 11.2 percent in the past three months, the most in emerging markets, as oil prices slump and the bolivar sinks. The price of crude, which accounts for 95 percent of the nation’s export revenue, has fallen 48 percent in the past year. Oil slipped 0.5 percent Thursday to $51.14 per dollar as of 12:53 p.m. in New York.

The pace of Venezuela’s economic deterioration worries Siobhan Morden, the head of Latin America strategy at Jefferies Group LLC. “It’s only just beginning,” she said by phone from New York. “This economic shock could eventually undermine their willingness to pay.”

Hanke’s archive of hyperinflation runs from France in 1795 and 1796, when prices rose as fast as 304 percent in a month, to Hungary in July 1946, when prices doubled every 15 hours. The most recent outbreak was in Zimbabwe between 2007 and November 2008.

‘Getting Worse’

Michael Ganske, head of emerging markets at Rogge Global Partners in London, said he’s still holding Venezuelan bonds but there’s no denying “that things are getting worse.”

Nubia Mendoza, who sells cleaning products from a stall in Mercado Chacao, a farmer’s market in the affluent east side of Caracas, can attest to Venezuela’s deepening woes. Mendoza, 40, said she no longer updates the hand-written list of prices posted for shoppers.

“Prices are going up practically every day,” she said. “People get upset. They just don’t understand. But after they go out and hunt for goods themselves and realize they can’t find what they want, they end up back here and paying the price. What else can you do? The whole situation makes you feel impotent.”