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October 10, 2014

#Venezuela: Crisis averted? @beyondbrics

Great management of the treasury:
International reserves declined $1.8bn, which is likely being used to pay the $1.5bn of the sovereign bond…

Venezuela: Crisis averted?

By Pan Kwan Yuk and Andres Schipani

Thumbing his nose at critics, Venezuela’s finance minister, Rodolfo Marco Torres, said on Wednesday via a series of tweets that the socialist government has paid a $1.5bn government bond that was due.

As fastFT reported, Mr Torres took to Twitter, under the hashtag #VenezuelaSeRespeta, or Respect for Venezuela, to write:

Acknowledging the instruction of our president Nicolás Maduro, today we paid #GlobalBond2014 #RespectForVenezuela

Today we paid $1.561.665.000 in capital and corresponding interests of #GlobalBond2014 #RespectForVenezuela

The Boliviarian government shows its commitment to the Motherland and the capacity to honour its obligations #GlobalBond2014 #RespectForVenezuela

Amid a spiralling economic vortex that sent inflation to gallop at 63 per cent, pessimism over a lack of necessary adjustments, among other issues, rattled Venezuela’s debt market in recent weeks, fuelling fears of default on bond payments due this year.

As fastFT explained:

The cost of insuring Venezuelan debt against a possible default spiked sharply to within a whisker of a six-year high last month after Standard & Poor’s downgraded Venezuela’s rating to CCC+ and said there was a 50-50 chance that the government would renege on its debts over the next two years.

Not surprisingly, following Torres’s announcement on Wednesday, the five-year CDS price on Venezuela fell sharply – by as much as 62.37 basis points, the biggest drop in the world.
Beating its chest, Venezuela’s communications ministry, then issued a statement saying:

This payment, which was always planned, dismantles a campaign launched by international financial capital’s spokespeople and media to harm the Republic’s image and its people’s integrity with perverse political and economic aims.
While some analysts have argued that default fears were overdone from the start, some remain sceptical over the state of Venezuela’s finances, which are in shambles following years of mismanagement. Barclays said in a note in Tuesday, called “Venezuela: Payment in Process”:

International reserves declined $1.8bn, which is likely being used to pay the $1.5bn of the sovereign bond…

The use of BCV international reserves to pay the maturing bond raises some concerns. In the past, the treasury tended progressively to accumulate resources outside the reserves for bond payments. This is a signal of less provident procedures followed by the authorities and their liquidity constraints.
The next test for the country, as fastFT noted, will come on October 28 when state-owned oil company PDVSA is due to make a $3bn debt repayment.

Related reading:
Venezuelan CDS climbs again as default fears mount, beyondbrics
S&P: Venezuela has 50:50 odds of default, beyondbrics
Guest post: why Venezuela should not default, beyondbrics
Spectre of default looms over Venezuela despite oil reserves, FT

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