Odds of Venezuelan Default Within 5 Years Hits 63%; Investors Realize Venezuela May Run Out of Money

Venezuela has nice oil reserves but the government is spending more cash than it receives from pumping oil.

Investors are finally starting to realize Venezuela may run out of money and will be forced to default on bonds.

Please consider Venezuelan Bond Rout Deepens as Default Specter Raised

Venezuelan debt traders are beginning to consider the possibility the country may run out of money.

The cost of insuring the country’s foreign-currency bonds against non-payment soared yesterday by the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse in 2008 to 14.25 percentage points, the most expensive in the world.

While most analysts and investors expect Venezuela and its state-owned oil company to make $5.3 billion in bond payments coming due next month, concern is mounting the country may find itself without enough cash to service debt as soon as next year as foreign reserves drop to an 11-year low and oil prices sink. The nation’s notes tumbled yesterday after Ricardo Hausmann, a Venezuelan-born economist at Harvard University, questioned the government’s decision to keep paying bondholders in the face of shortages of everything from basic medicine to toilet paper.

“The bond market is finally beginning to wake up” to the possibility of Venezuela defaulting, David Rees, an economist at Capital Economics in London, said by phone. He predicts the country could default as soon as this year.

Venezuela’s bonds fell 4.4 percent yesterday, pushing the extra yield investors demand to own the nation’s debt instead of U.S. Treasuries to a six-month high of 11.95 percentage points, data compiled by Bloomberg show. The country’s notes now yield 3.31 percentage points more than debt from similarly rated Ukraine.

The probability of Venezuela missing a payment on its bonds in the next five years rose four percentage points to 63 percent yesterday, according to traders in the credit-default swaps market. The cost of insuring Venezuela’s debt passed Argentina’s after that country missed a July 30 payment deadline, causing trading to be suspended.

I have been talking about this possibility for quite some time and consider default on foreign-denominated bonds to be the baseline scenario.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com