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Sonntag, 17. April 2016

2 Reasons Venezuela Won’t Default

2 Reasons Venezuela Won’t Default

 
 
 
Venezuela is not insolvent because it has immense oil reserves, according to the premise of aBank of America/Merrill Lynch report today that says the country can avoid a debt restructuring.
The International Monetary Fund, in its economic growth outlook for 2016, said that “projecting the economic outlook in Venezuela is complicated by the lack of any Article IV consultation since 2004 and delays in the publication of key economic data.”
Dimitra DeFotis/Barron’s
Bolivars in a Florida Keys bait shop.
Venezuela is cashing in gold reserves, and the lack of data has fueled much speculation that Venezuela will default. But could it avoid default? That would require that Venezuelan authorities implement comprehensive economic reforms to stabilize the economy and jump-start long-term growth. Otherwise, a forced restructuring would put the country’s life blood — oil exports — at risk, write BofA debt strategists and economists David Hauner, Claudio Irigoyen, Claudio Piron, Helen Qiao andFrancisco Rodriguez. That said, reforms wouldn’t replace the dollar revenue desperately needed in the short term given the low price of oil.
The price of crude is up less than 1% today, with the international Brent benchmark hovering near $44 per barrel. BofA’s experts write, in light of weak oil prices, that:
” … there would appear to be a good argument for extending current maturities to give time to carry out the reforms needed to raise production and growth.
“But does this make a forcible restructuring necessary? Imagine that the Venezuelan government announced that it will unify and float the currency, eliminate price controls, raise gasoline and electricity prices to international levels, replace the system of indirect subsidies by a direct transfer program, open up the country’s oil and mining sectors, privatize unprofitable state-owned enterprises and bring fiscal and current account deficits to levels compatible with long-term sustainability. Assume also that markets view these policy commitments as credible – perhaps because they are being made by a new administration backed by a solid majority in the legislative branch and a strong electoral mandate. Would Venezuela regain market access if it did all these things?
We believe the answer is an unequivocal yes. In fact, not lending to such a government would be a poor investment decision … Given estimated financing needs of $20-25 billion this year alone, Venezuela would have strong reasons to ask for IMF support of its macroeconomic adjustment program. Yet the IMF could balk at committing a large level of resources without requesting bondholders to do the same. We believe this argument is wrong. …  In the Fund’s words, “in most Fund-supported programs, a combination of policy adjustment and financing from the Fund catalyzes spontaneous external financing… As a consequence, the member is able to continue to service its debt in accordance with its original terms …
[Calculating] Venezuela’s external debt plus net internal debt valued at the economy’s average FX rate across all transactions, we estimate a total debt stock of $167 billion, or 80% of GDP (22% internal, 58% external) … Venezuela’s current debt stock is similar or lower to the post-restructuring levels of eight” comparison IMF debt programs/restructurings.
The iShares Latin America 40 exchange-traded fund (ILF) was down 1.5% in recent trading. The Market Vectors Emerging Markets High Yield Bond ETF(HYEM) and  iShares JPMorgan USD Emerging Markets Bond ETF (EMB) rose fractionally.

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