Venezuela Bonds Tumble On Report U.S. To Ban Trading

Venezuela bonds are tumbling after the WSJ reported that the US government was considering a ban on trading in the country's debt. PDVSA’s 12.75% 2022s were trading at 44.75 this morning,down from around 45.65 at Tuesday's close and two points weaker than levels seen earlier in the week, according to MarketAxess. Bond traders also sold PDVSA's 6% 2026s, which had fallen about a point to 30.00.

On Tuesday evening, the WSJ reported that the U.S. government is considering "restricting trades in Venezuelan debt as it seeks to punish President Nicolás Maduro for undermining the country’s democracy" and that "the unprecedented move would temporarily ban U.S.-regulated financial institutions from buying and selling dollar-denominated bonds issued by the Republic of Venezuela and state oil company Petróleos de Venezuela SA, according to a person who was briefed on the proposal."

One option being considered is banning the trading in just some papers issued by the state oil company to limit its access to external funds, said a third person. The ban would be the first step against the Venezuelan financial system since Mr. Trump promised “swift economic action” against Mr. Maduro for installing a parallel parliament staffed with loyalists earlier this month.

Then again, Trump may not have to lift a finger to accelerate Venezuela's default. As reported last week, following the recent sanctions against Maduro's socialist paradise, foreign banks are shutting out Venezuelan companies and are refusing to provide the country's oil tankers with the letters of credit they need to offload oil, and replace it for one commodity most needed in Venezuela: hard dollars.  As a result, the decline in PDVSA's (and Venezuela's) dollar reserves is accelerating with every day, a pace which roughly tracks the recent plungein Venezuela bonds.

Or not.

Not everyone is convinced that Venezuela is facing an imminent default. In a separate report, the WSJ writes that one large holder of Venezuelan debt, Ashmore Group PLC, thinks investors have come to the wrong conclusion.

Mr. Maduro’s political power “has just increased dramatically,” said Jan Dehn, head of research at the emerging-market fund, which has $56 billion under management. The July vote, which was widely seen as fraudulent, convened a powerful new assembly aligned with Mr. Maduro that will be able to override other institutions and redraft the constitution.

 

Mr. Maduro’s administration has prioritized paying bondholders, even as the wider economy has shrunk, sparking widespread unrest and food shortages. As long as he retains a tight grip on power, that is unlikely to change, Mr. Dehn believes.

According to Dehn, Maduro’s political strength is one of three factors that should mean the country “can continue to service the debt indefinitely.” The other two are that oil remains above $40 a barrel and that state-owned oil company Petróleos de Venezuela SA, PdVSA, retains access to working capital.

Additionally, Maduro is afraid what would happen to PDVSA assets once the country defaults (not to mention to the army's support of his regime, which has been solid as long as the money keeps flowing):

Most analysts and investors believe that this is because the government wants to keep the oil flowing. PdVSA is responsible for half of Venezuela’s fiscal income and some 90% of its exports, according to Standard & Poor’s.  For some analysts, Venezuela’s fear is that a debt default would push investors to try to seize PdVSA’s foreign assets.

 

Mr. Dehn has another theory over what is behind that fear: that PdVSA’s so-called joint venture partners, such as Russia’s Rosneft and China, would pull lines of credit if the country defaulted. That would starve it of working capital and prevent it from producing oil.

 

“If he stops [servicing the debt]…oil production will stop. The government will fall,” said Mr. Dehn.

In thie case, one can imagine why Maduro would do everything in his power to delay default until the bitter end, both for creditors and his administration, which has so far had the support of the army but will promptly lose it once the cash flow tries up. That's also why many Venezuelan bonds rebounded since the Constitutional Assembly vote.

However, if the Journal is corect and the US is about to block trading of Venezuela bonds, that could well be the tipping point that forces creditors to finally give up on the Caracas regime, leading to a prompt default and the fall of Maduro, in the process Washington will once again have succeeded in toppling a foreign regime, this time without firing a single shot.