Venezuela’s Election Threatens to Extend Bond-Market Exile
(Bloomberg) -- The political turmoil unleashed by Venezuela’s presidential election is threatening to extend the nation’s economic isolation and derail any moves toward restructuring its debt.
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President Nicolas Maduro’s declared victory in Sunday’s vote set off an escalating conflict, with the opposition alleging fraud and his government claiming its rivals tried to sabotage the election.
The outcome is casting doubt on hopes that the US will lift economic sanctions any time soon, promising to leave the nation cut off from international capital markets and delay efforts to deal with some $150 billion of defaulted bonds, loans and legal judgments owed to creditors from Wall Street to China.
The pessimistic outlook quickly showed up in markets, where sovereign and state oil company bonds — already trading deeply into distressed levels — fell further as investors waited to see how the dispute will play out.
“At the very least, Maduro’s stay will prolong the entire restructuring process,” said Alejandro Arreaza, an economist at Barclays. “That has a high cost of opportunity for creditors.”
Venezuela’s 2027 bonds slipped 2.3 cents to 19.5 cents on the dollar, the lowest in nearly four weeks, according to indicative pricing data collected by Bloomberg. PDVSA bonds also fell, with notes maturing in 2026 losing 2.2 cents to trade around 12 cents on the dollar.
Venezuela started defaulted on its debt in 2017 after years of economic chaos caused by hyperinflation and authoritarian politics that had left it increasingly isolated from much of the world. Maduro, who has since brought some stability to the economy, had recently taken first steps toward what was expected to be a lengthy and complex effort to rework its debts and regain access to world markets.
Timing of Recoveries
The allegations that Maduro’s re-election victory was the result of fraud cast new shadows over the country’s international standing, with the opposition claiming that rival Edmundo Gonzalez was well ahead in the partial, raw voting data to which it had access.
“Maduro’s continuation probably impacts the timing of recoveries more than the recovery value itself at this stage,” said Stuart Culverhouse, chief fixed-income strategist at Tellimer, which has a hold rating on the country’s debt.
The US, which has Maduro and several Venezuelan officials under sanctions, was quick to express doubts about the official tally. Some left-wing governments in Latin America also refrained from endorsing the results, with Chile’s Gabriel Boric saying “they were hard to believe” and Colombian Foreign Minister Luis Gilberto Murillo requesting a full recount of the votes to “dispel any doubts.”
Venezuelan authorities had claimed that the full election results were delayed by a cyberattack but certified Maduro the winner Monday. Public Prosecutor Tarek William Saab also turned the allegations wrongdoing onto the opposition, saying popular leader María Corina Machado was a key suspect in its investigation of alleged electoral sabotage. Bonds fell to session lows after his comments.
“This situation is likely far from resolved,” wrote Ricardo Penfold, a managing director at Seaport Global, which has an overweight rating on Venezuela bonds. “Clear signals are needed that either the election results are accepted by the EU and US or that a negotiation process is underway.”
Markets widely expected Maduro to stay in power, pricing in only about a one-in-three chance of the opposition winning in the lead up to the vote, according to Barclays estimates. But major evidence of fraud would put pressure on its bonds by stanching Venezuela’s efforts to repair its international standing.
The uncertainty around the election has helped keep prices for the defaulted debt stuck in deeply distressed levels. Most notes issued by the government and oil company Petroleos de Venezuela SA trade below 20 cents on the dollar despite being reweighted in widely followed JPMorgan Chase & Co. indexes this year.
Should the results stand, Maduro will be sworn in for a third six-year term in January after more than a decade in power. His government had been negotiating with the opposition and the Biden administration on conditions to guarantee that the vote was fair.
“I don’t see any likely restructuring if there is no recognition of the result and at the moment and we don’t know yet what the international community thinks and what the US positioning will be regarding the result,” said Francesco Marani, head of trading at Spanish investment firm Auriga Global Investors, which holds Venezuela debt.
“I don’t think the US will legitimize the result — but it likely won’t close the door at the moment, given that is better to have a negotiation open and ongoing.”
--With assistance from Walter Brandimarte.
(Updates with latest bond market move in sixth paragraph)
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