Drawing comparisons with Argentina’s default in 2001, BNP Paribas head of emerging markets fixed income L. Bryan Carter said the country was “now quite simply out of money and faces imminent dollar access shortages”.
“We know the government is already running domestic arrears, prioritising foreign debt service over payments to government employees and suppliers,” he said.
“We also know the situation has become a humanitarian crisis with accumulated product shortages now affecting the mass populace. We are watching the Venezuelan street for potential catalysts.”
Mr Carter added that the contagion risk posed by a Venezuelan default could be even bigger than Argentina’s, despite the country’s benchmark weight.
“Venezuela’s benchmark weight may seem small due to bonds already being priced at distressed levels, in notional amounts; the scale of the risk is similar to Argentina,” he explained.
“The face value market capitalisation of the country’s benchmark bonds stands at nearly $17.93 billion vs. $14.75 billion for Argentina in 2001.”
Mr Carter said default by non-payment, as opposed to through debt restructuring, would likely have a contagion effect that would initially spread regionally to Colombia, Brazil and possibly “the assorted Caribbean countries that have benefited from Venezuela’s Petrocaribe program”.
“While we don’t gauge that emerging assets are yet in bubble territory, we do see that the market has forgotten what an emerging market default means and what havoc contagion brings. We believe that under a Venezuelan default event, global correlations will rise,” Mr Carter cautioned.
“We recommend investors take early note of their managers’ Venezuela exposures and positioning and assess their risk tolerance for weathering the default ahead.”
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