Post by Tony Enriquez on Jan 18, 2015 20:28:29 GMT 4
China Plays Wildcard in Bets on Venezuela Bond Default
By Katia Porzecanski and Sebastian Boyd Jan 13, 2015 7:05 AM PT
For debt investors betting Venezuela will default this year as oil slumps, there is one big wildcard that threatens to sink the trade: China.
The Asian nation, whose $3.9 trillion in foreign reserves are the world’s largest, has a history of lending out money to Venezuela, having doled out $45 billion over the past decade. And it has a strong incentive to provide more -- Venezuela sits on the world’s biggest oil reserves while China is the top crude importer.
When President Nicolas Maduro headed out on an overseas trip last week in search of cash to shore up the reeling economy and help stave off default, China was his first stop. He spent four days there and left saying he had won pledges for $20 billion in new investment. Maduro needs money fast as the six-month, 56 percent plunge in oil has derivatives traders betting there’s a 75 percent chance that Venezuela will default in a year and 97 percent probability that it will happen within five years.
Financing from China could reduce the “liquidity pressures,” Daniel Chodos, a strategist at Credit Suisse Group AG, said by phone from New York. He still retains an underweight recommendation on the country’s debt. “We’re not saying this solves Venezuela’s problems but at least in the near term it reduces the risk of default.”
‘Sufficient Oxygen’
Three days after leaving China, Maduro said he was also lining up “various” billions of dollars for 2015 and 2016 from lenders in Qatar. “We’re finalizing a financial alliance with important banks from Qatar that will give us sufficient oxygen to cover the fall in oil prices,” Maduro said in comments carried on state television.
But it’s China that’s seen as Venezuela’s best chance for emergency cash. Maduro said Jan. 7 that the Chinese investment will be for economic, energy and social projects. He didn’t say how quickly the money could come in or provide other details. Much of the previous loans were arranged to be repaid by Venezuela in oil supplies.
Maduro is “an old and good friend of the Chinese people,” and China supports his efforts to restructure the economy, President Xi Jinping said in a Jan. 8 speech.
Prices on Venezuela’s benchmark dollar-denominated bonds due in 2027 sank 50 cents in the past six months to 37.27 cents on the dollar, sending their yield over 25 percent. The securities fell 1.44 cents on the dollar today, headed for the lowest close since 1998. And traders charge a higher rate to insure Venezuelan bonds against a default than they do on debt from any other nation.
Highest Inflation
Moody’s Investors Service cut Venezuela’s credit rating to Caa3 today, nine levels below investment grade, saying the risk of default had increased substantially as external finances deteriorate due to the decline in oil prices.
Even with the myriad problems facing the South American nation, from soaring inflation to shortages of basic goods, its oil reserves are an attractive enough asset to persuade China to provide more support, according to Jan Dehn, head of research at Ashmore Group Plc, which manages about $70 billion in emerging-market assets.
“The Chinese are looking at this as an opportunity that is much more long-term whereas for Maduro this is obviously a very much-needed short-term relief,” he said by telephone from London. “He’s up against the wall now. This fall in oil prices is a disaster for him.”
Budget Deficits
Under Maduro and his predecessor Hugo Chavez, Venezuela has run the steepest budget deficits of any major economy, printing money to plug the gap and generating the world’s fastest inflation. The economy, which depends on oil for 95 percent of its exports, shrank 3 percent last year, the most in Latin America, according to International Monetary Fund estimates.
At $21 billion, the country’s foreign reserves cover two years of overseas debt payments for the government and state oil company Petroleos de Venezuela SA. Research company Eurasia Group estimates that less than $2 billion of that can be readily deployed to pay debt, with much of the reserves invested in gold.
Even if the cash from China is earmarked for infrastructure projects, “getting that money frees up assets to cover up external financing,” Credit Suisse’s Chodos said.
To contact the reporters on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net; Sebastian Boyd in Santiago at sboyd9@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net Lester Pimentel, Bradley Keoun
Source of Original Article:
www.bloomberg.com/news/2015-01-13/china-plays-wildcard-in-bets-on-venezuela-bond-default.html
By Katia Porzecanski and Sebastian Boyd Jan 13, 2015 7:05 AM PT
For debt investors betting Venezuela will default this year as oil slumps, there is one big wildcard that threatens to sink the trade: China.
The Asian nation, whose $3.9 trillion in foreign reserves are the world’s largest, has a history of lending out money to Venezuela, having doled out $45 billion over the past decade. And it has a strong incentive to provide more -- Venezuela sits on the world’s biggest oil reserves while China is the top crude importer.
When President Nicolas Maduro headed out on an overseas trip last week in search of cash to shore up the reeling economy and help stave off default, China was his first stop. He spent four days there and left saying he had won pledges for $20 billion in new investment. Maduro needs money fast as the six-month, 56 percent plunge in oil has derivatives traders betting there’s a 75 percent chance that Venezuela will default in a year and 97 percent probability that it will happen within five years.
Financing from China could reduce the “liquidity pressures,” Daniel Chodos, a strategist at Credit Suisse Group AG, said by phone from New York. He still retains an underweight recommendation on the country’s debt. “We’re not saying this solves Venezuela’s problems but at least in the near term it reduces the risk of default.”
‘Sufficient Oxygen’
Three days after leaving China, Maduro said he was also lining up “various” billions of dollars for 2015 and 2016 from lenders in Qatar. “We’re finalizing a financial alliance with important banks from Qatar that will give us sufficient oxygen to cover the fall in oil prices,” Maduro said in comments carried on state television.
But it’s China that’s seen as Venezuela’s best chance for emergency cash. Maduro said Jan. 7 that the Chinese investment will be for economic, energy and social projects. He didn’t say how quickly the money could come in or provide other details. Much of the previous loans were arranged to be repaid by Venezuela in oil supplies.
Maduro is “an old and good friend of the Chinese people,” and China supports his efforts to restructure the economy, President Xi Jinping said in a Jan. 8 speech.
Prices on Venezuela’s benchmark dollar-denominated bonds due in 2027 sank 50 cents in the past six months to 37.27 cents on the dollar, sending their yield over 25 percent. The securities fell 1.44 cents on the dollar today, headed for the lowest close since 1998. And traders charge a higher rate to insure Venezuelan bonds against a default than they do on debt from any other nation.
Highest Inflation
Moody’s Investors Service cut Venezuela’s credit rating to Caa3 today, nine levels below investment grade, saying the risk of default had increased substantially as external finances deteriorate due to the decline in oil prices.
Even with the myriad problems facing the South American nation, from soaring inflation to shortages of basic goods, its oil reserves are an attractive enough asset to persuade China to provide more support, according to Jan Dehn, head of research at Ashmore Group Plc, which manages about $70 billion in emerging-market assets.
“The Chinese are looking at this as an opportunity that is much more long-term whereas for Maduro this is obviously a very much-needed short-term relief,” he said by telephone from London. “He’s up against the wall now. This fall in oil prices is a disaster for him.”
Budget Deficits
Under Maduro and his predecessor Hugo Chavez, Venezuela has run the steepest budget deficits of any major economy, printing money to plug the gap and generating the world’s fastest inflation. The economy, which depends on oil for 95 percent of its exports, shrank 3 percent last year, the most in Latin America, according to International Monetary Fund estimates.
At $21 billion, the country’s foreign reserves cover two years of overseas debt payments for the government and state oil company Petroleos de Venezuela SA. Research company Eurasia Group estimates that less than $2 billion of that can be readily deployed to pay debt, with much of the reserves invested in gold.
Even if the cash from China is earmarked for infrastructure projects, “getting that money frees up assets to cover up external financing,” Credit Suisse’s Chodos said.
To contact the reporters on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net; Sebastian Boyd in Santiago at sboyd9@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net Lester Pimentel, Bradley Keoun
Source of Original Article:
www.bloomberg.com/news/2015-01-13/china-plays-wildcard-in-bets-on-venezuela-bond-default.html