Could the Oil Slump Push This Country to Default?

The cost of protecting against a Venezuelan default has hit record highs, leading to fears that the oil-dependent country could become the first sovereign victim of plummeting oil prices.

Spreads on Venezuelan five-year credit default swaps (CDS)—derivatives that can be used to hedge against the risk of a country or corporate defaulting—are at their highest since the global financial crisis of 2007/08, indicating heightened expectations of the government failing to repay its debts.

This comes at the South American country grapples with a toxic combination of U.S sanctions, recession and hyperinflation, with economic mismanagement and a 50 percent collapse in oil prices bringing it to its knees.

Markit fixed income analyst, Neil Mehta, warned that the “first sovereign casualty of the oil price slump may be on the horizon” and told CNBC that Venezuela’s CDS spread implied a 96 percent chance of a default in the next five years and a 69 percent probability in the next 12 months.

“The outlook doesn’t look good,” he told CNBC in a telephone interview last week. “Certainly, a default is what credit markets are implying.”

Venezuela’s economy hit the doldrums in 2014, shrinking 4 percent while inflation averaged a staggering 62 percent over the year.

“Lower oil prices have simply compounded dire economic conditions in Venezuela, which look set to culminate in a sovereign default,” said David Rees of Capital Economics in a research note on Friday.

As its reserves dwindle, Venezuela is heading into its heaviest time for this year’s debt repayments, with just over $4 billion due in October to November. These payments are split between the sovereign and state-owned oil company, Petróleos de Venezuela (PDVSA).

CNBC

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