Venezuela From Bad To Worse As Moody's Rates Debt World's RiskiestMark Melin
The situation in Venezuela has gone from very bad to worse, as the death toll of protesters mounts and the government’s financial picture increasingly teeters on solvency. Amid civil unrest, where armed pro-government gangs harassed unarmed protesters as they marched on the Supreme Court Wednesday, a Moody’s report notes that the government’s bonds are more at risk of default than any nation they rate. With the price of oil dropping 15% since December, the country’s main source of revenue is only worsening the fiscal strife. In short, debt holders beware.
Is Venezuela more about a war on capitalism?
Just when observers might have thought the situation in Venezuela was hitting bottom, it only gets worse. Plagued by food shortages and skyrocketing inflation amid the government literally printing money as fast as it can procure paper – and residents raiding a local zoo to kill the animals for sustenance – the price of oil drops, further crimping a government that at one point attempted to force the Pepsi corporation to sell its products at a loss and jailing those who did not comply.
In April, the pressure was turned up even further.
President Nicolás Maduro’s socialist government seized a General Motors auto plant that employed 2,700 workers without providing an explanation. The move resulted in the US auto manufacturer leaving the country while calling the appropriation of its assets “an illegal judicial seizure.”
A Washington Post report reported speculation that Maduro might be positioning the government for a wider conflict with the US and a broader fight against a capitalist system.
“It fits a broader pattern, in the sense that the government’s response to surges in opposition activity tends to be the deepening of the revolution,” Phil Gunson, a Venezuela-based analyst for the International Crisis Group, was quoted as saying. “There are those at the top, including Maduro himself, who appear genuinely to believe that this is a revolution and the ultimate goal is the replacement of the capitalist economy with one that is entirely state-run.”
If such a war against capitalism were to escalate, where does that leave those who purchased Venezuelan bonds?
Venezuela fate and the price of oil are correlated
Into this crevasse walks Moody’s analysts Irina Baron and Xian Li who point out that, in large part, as the price of oil goes so goes the fate of Venezuela’s fortunes.
Oil accounts for half of the government’s revenues and 95% of the nation’s exports, they note in a report titled “Lower Oil Prices Add To Venezuela’s Economic Woes.”
When the price of oil was perched at $90 per barrel in June 2014, the nation’s dependent correlation to the price of oil wasn’t much discussed. Now with the price cut nearly in half, there is a realization that limited resources is like a game of musical chairs: someone is going to be left without basic necessities or bond returns when the music stops playing.
The heightened risk of bond investors being left out in the cold is already priced into the markets.
Moody’s notes government debt and credit default swaps markets are pricing in a heightened risk of a Venezuelan default. The nation’s US dollar-denominated notes maturing in 2022, for instance, traded as low as 57 cents on the dollar and yielded an eyebrow raising 32%.
As if to underline the risk, Moody’s now gives Venezuelan bonds the highest probability of default, above that of Greece and other debt-strapped governments.
Venezuela’s Sovereign EDF measure is higher than the 69 other sovereign entities in our dataset, well ahead of Greece (3.7%) and Ukraine (2.9%) which are the second and third-riskiest sovereigns, respectively. Venezuela’s elevated Sovereign EDF measure is in line with where Greece was three months prior to its March 2012 distressed-debt exchange.
The country teeters back and forth. Venezuela’s five-year credit default swap spread recently widened by 349 basis points to 3,402 basis points.
What is at play might be more than a statement on the price of oil, but a commentary on autocratic government control over free markets. Venezuela can climb out of its problems as the price of oil rises as well, but the long-term effects of a government’s move from capitalism to socialism will likely linger.
Venezuela Fights Free Markets And Is Losing, Flies In Planes Stuffed With Cash (Seriously)
Originally published 2/6/2016 at 7:36 PM
If there was a textbook on how a government digs an untenable economic hole through market manipulation and currency debasement, Venezuela in recent times could be the latest chapter of a similar story seen throughout history. Exhibit A: The once oil rich communist nation recently paid outside printing companies to crank up literal presses to import paper currency. When three cargo planes stuffed with cash landed in Venezuela, President Nicolas Maduro’s administration might have breathed a temporary sigh of relief. However, the very act of currency desperation that comes from watching the undeniable force of free markets work could lead to the regime’s ultimate destruction and its citizen's punishment. This isn't the first time in history a government and its financial dictates have led a nation and its people into the financial abyss. Throughout history currency debasement has been an issue, perhaps most noticeable in post World War I Germany and in the once mighty Soviet Union.
Cargo planes stuffed with Venezuela's cash are a sign of desperation as people carry stacks of cash to go out to dinner
Three dozen 747 cargo planes filled to the brim with increasingly worthless paper currency landed in cash starved Venezuela recently, The Wall Street Journal first reported. Venezuela’s government imported at least five billion bank notes and began secret negotiations to order 10 billion more, the report noted.
To put the size of this currency shopping spree in context, the recent printing binge nearly doubles the size of the total amount of currency in circulation. When supply increases, the value drops. Printing 10 billion bolivars isn’t going to much help inflation, which is stoking near 720% on average. Meats which cost 30 bolivars in December 2014 increased 537% to 161 bolivars on a year over year basis. A combination of fruits and vegetables which likewise cost near 30 bolivars now cost close to 120 bolivars, dramatically impacting everyday life.
“Venezuelans have to carry stacks of cash as many vendors try to avoid transaction fees,” the report almost humorously noted. “Dinner at a nice restaurant can cost a brick-size stack of bills,” which in some cases might remind one of the hyperinflation that was experienced in the Weimar Republic in post World War I Germany.
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