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Two years ago, distressed debt investors began to refer to Argentina, Ukraine and Venezuela as the unholy trinity, the three countries considered most likely to default on their debts. Argentina and Ukraine succumbed last year. If markets are right, Venezuela will not be far behind.
The ugly sell-off in credit linked to oil picked up speed once again on Tuesday — and as a founding member of Opec, the oil producers’ cartel, and a country that depends on oil for 95 per cent of export revenue, the price slide is hurting Venezuela badly.
Caracas might be making soothing noises about plans to service its debts but there are growing fears that the government, and state-owned oil company Petróleos de Venezuela, are running out of money. As the state printing press continues to churn out new banknotes, inflation is expected to hit a fantastical 720 per cent this year.
Investors have been buying into the country’s short-dated debt, betting that payments will continue for the next few months. After that, the conversation shifts to what might be recouped in the event of default and debt restructuring.
Venezuela’s benchmark 2027 dollar bond is yielding more than 29 per cent, and according to Barclays a “credit event” is on the cards unless oil prices stage a remarkable recovery. That seems unlikely as prices for international benchmark Brent go back to fluttering around $30 a barrel this week.
Falling oil prices mean that safe-haven bonds are back in demand, while equity investors have paused to see whether the US Federal Reserve is sufficiently fearful about the market rout to intimate a delay in interest rate rises when it meets on Wednesday.
While no one is forecasting that default by Venezuela will trigger a blow-up across emerging markets, distressed debt points to where future problems may lie for the health of the global economy if investors decide that oil is an asset that has been overvalued for far too long.
There are already worries about commodity-linked corporate borrowers weighed down by dollar-denominated debt. Venezuela should encourage investors to think about the dangers of oily sovereigns, too.
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