carib
rerum cognoscere causas
ashmore from this week.
Venezuela: Provided Venezuela continues to pay principal and coupons, even if the payments are late, as
Venezuela has been doing so far, then it would seem that everyone could yet emerge a winner from the last
two weeks of extreme volatility in that country’s bond markets. The most recent bout of volatility was triggered,
when market participants, rating agencies and much of the financial media interpreted President Nicholas
Maduro’s statement that he would “refinance and restructure” Venezuela’s external debt to mean that he would
default immediately. Bond prices tumbled right away, at one point touching 20 cents on the Dollar, and the
weighted spread over US Treasuries on the 21 Venezuelan bonds in the JP Morgan EMBI benchmark fluctuated
wildly between 3000bps and 4884bps. Yet, the death of Venezuelan bonds may as yet prove premature. Last
week officials repeatedly stated that all due payments on bonds issued by government, PDVSA (the national
oil company) and even Electricidad de Caracas (EDC), a PDVSA owned utility, whose bond does not cross-
default with other bonds, would be paid in full. Some of payments arrived and others appear to be en route to
investors’ portfolios. If these payments do indeed arrive then it would seem that bond holders will not lose
money, while active buyers of the dip could make very attractive returns over the coming months. Indeed, if
spreads stay where they are today and Venezuela continues to service, debt investors can reasonably expect
to make more than 30% in Dollar terms between now and the next principal repayment in August 2018.
The volatility of the past couple of weeks was to some extent justified. After all, payments were indisputably
late. However, there is arguably a difference between inability and unwillingness to pay on one hand and
paying late on the other. Moreover, there is a good explanation for the late payments. Sanctions recently
imposed on Venezuela by US President Donald Trump continue to severely interrupt the normal payment
mechanisms. A situation where government ability and willingness to pay were both intact, but payments
were held up by actions taken by third parties is not without precedent: a few years ago a judge in New York
issued an injunction barring financial intermediaries from processing payments on Argentinian debt. Argentina
paid in full once the injunction was lifted. CDS was triggered, but bonds holders never accelerated and
investors were eventually paid in full.
Last week the International Swaps and Derivatives Association (ISDA) similarly ruled that a credit event had
taken place, which means that owners of Venezuelan default protection (credit default swaps, or CDS) will also
have a pay day. This is akin to being paid on your car insurance, when your car is, so far at least, intact. This is
possible because the payments delays constitute a credit event under the rules governing CDS. However,
CDS and bonds are completely different contracts, so the declaration of a credit event in CDS has no impact
on the status of the bonds, where de facto a default only occurs if a sufficient number of bond holders chose
to accelerate one or more bonds.
So has Venezuela defaulted? The financial press wasted no time confirming whether the bond cash flows will
be paid or not. They leapt to the conclusion that a default had happened (“Venezuela goes bust” screamed the
Wall Street Journal’s Editorial Board, while the Financial Times claimed that “Venezuela slips deeper into crisis
after default”). Ratings agencies were also quick to the trough, downgrading both the sovereign and PDVSA,
though, as usual, the downgrades happened after bonds had already tumbled. It was noticeable that there
was no consistency across ratings agencies as to which bonds – sovereign or PDVSA – were downgraded and
as to whether the trigger for downgrades were missed deadlines on coupons or missed deadlines on principal
payments. The lack of consistency here is clearly a source of risk for investors, who pin their faith on the
opinions of these institutions.
In retrospect, the events in the Venezuelan bond market of the past couple of weeks are far from unique.
Many similar events have taken place in the past. Four general observations can be made about such events.
First, the volatility of asset prices during the event often turns out to be far greater than actual riskiness, that
is, permanent losses (of which there have so far been none in this case). Second, banks, the media and even
ratings agencies waste no time in getting on the side of the market momentum and thus typically end up
reinforcing herd dynamics rather than throwing genuine light on proceedings. Third, the true nature of what
went on is often obscured until long afterwards and then rarely explained as attention has shifted elsewhere.
It is noticeable that in this case there has been precious little attention paid to the fact that President Maduro
repeatedly stated that he had no intention to default. Nor did the media show much interest in the possibility
that Maduro’s comments may have been intended for domestic consumption, which would have made them
far less alarming. After all, it is almost certain that it was claims made by the opposition in Venezuela that
Maduro was hurting Venezuelans by not refinancing the debt, which prompted Maduro to raise the whole
issue of refinancing. Maduro’s public display of trying to refinance may have been done to demonstrate that it is precisely impossible to do so because of US sanctions, which have been publicly supported by members
of the opposition. 1 In other words, there may not have been an intention to default at all, merely an elaborate
political scheme to deflect criticism back upon the opposition. If so, we should know in the coming days and
weeks. If the payments do indeed come in, then Venezuelan bonds have been severely mispriced in recent
weeks and now constitute an excellent buying opportunity.
Venezuela: Provided Venezuela continues to pay principal and coupons, even if the payments are late, as
Venezuela has been doing so far, then it would seem that everyone could yet emerge a winner from the last
two weeks of extreme volatility in that country’s bond markets. The most recent bout of volatility was triggered,
when market participants, rating agencies and much of the financial media interpreted President Nicholas
Maduro’s statement that he would “refinance and restructure” Venezuela’s external debt to mean that he would
default immediately. Bond prices tumbled right away, at one point touching 20 cents on the Dollar, and the
weighted spread over US Treasuries on the 21 Venezuelan bonds in the JP Morgan EMBI benchmark fluctuated
wildly between 3000bps and 4884bps. Yet, the death of Venezuelan bonds may as yet prove premature. Last
week officials repeatedly stated that all due payments on bonds issued by government, PDVSA (the national
oil company) and even Electricidad de Caracas (EDC), a PDVSA owned utility, whose bond does not cross-
default with other bonds, would be paid in full. Some of payments arrived and others appear to be en route to
investors’ portfolios. If these payments do indeed arrive then it would seem that bond holders will not lose
money, while active buyers of the dip could make very attractive returns over the coming months. Indeed, if
spreads stay where they are today and Venezuela continues to service, debt investors can reasonably expect
to make more than 30% in Dollar terms between now and the next principal repayment in August 2018.
The volatility of the past couple of weeks was to some extent justified. After all, payments were indisputably
late. However, there is arguably a difference between inability and unwillingness to pay on one hand and
paying late on the other. Moreover, there is a good explanation for the late payments. Sanctions recently
imposed on Venezuela by US President Donald Trump continue to severely interrupt the normal payment
mechanisms. A situation where government ability and willingness to pay were both intact, but payments
were held up by actions taken by third parties is not without precedent: a few years ago a judge in New York
issued an injunction barring financial intermediaries from processing payments on Argentinian debt. Argentina
paid in full once the injunction was lifted. CDS was triggered, but bonds holders never accelerated and
investors were eventually paid in full.
Last week the International Swaps and Derivatives Association (ISDA) similarly ruled that a credit event had
taken place, which means that owners of Venezuelan default protection (credit default swaps, or CDS) will also
have a pay day. This is akin to being paid on your car insurance, when your car is, so far at least, intact. This is
possible because the payments delays constitute a credit event under the rules governing CDS. However,
CDS and bonds are completely different contracts, so the declaration of a credit event in CDS has no impact
on the status of the bonds, where de facto a default only occurs if a sufficient number of bond holders chose
to accelerate one or more bonds.
So has Venezuela defaulted? The financial press wasted no time confirming whether the bond cash flows will
be paid or not. They leapt to the conclusion that a default had happened (“Venezuela goes bust” screamed the
Wall Street Journal’s Editorial Board, while the Financial Times claimed that “Venezuela slips deeper into crisis
after default”). Ratings agencies were also quick to the trough, downgrading both the sovereign and PDVSA,
though, as usual, the downgrades happened after bonds had already tumbled. It was noticeable that there
was no consistency across ratings agencies as to which bonds – sovereign or PDVSA – were downgraded and
as to whether the trigger for downgrades were missed deadlines on coupons or missed deadlines on principal
payments. The lack of consistency here is clearly a source of risk for investors, who pin their faith on the
opinions of these institutions.
In retrospect, the events in the Venezuelan bond market of the past couple of weeks are far from unique.
Many similar events have taken place in the past. Four general observations can be made about such events.
First, the volatility of asset prices during the event often turns out to be far greater than actual riskiness, that
is, permanent losses (of which there have so far been none in this case). Second, banks, the media and even
ratings agencies waste no time in getting on the side of the market momentum and thus typically end up
reinforcing herd dynamics rather than throwing genuine light on proceedings. Third, the true nature of what
went on is often obscured until long afterwards and then rarely explained as attention has shifted elsewhere.
It is noticeable that in this case there has been precious little attention paid to the fact that President Maduro
repeatedly stated that he had no intention to default. Nor did the media show much interest in the possibility
that Maduro’s comments may have been intended for domestic consumption, which would have made them
far less alarming. After all, it is almost certain that it was claims made by the opposition in Venezuela that
Maduro was hurting Venezuelans by not refinancing the debt, which prompted Maduro to raise the whole
issue of refinancing. Maduro’s public display of trying to refinance may have been done to demonstrate that it is precisely impossible to do so because of US sanctions, which have been publicly supported by members
of the opposition. 1 In other words, there may not have been an intention to default at all, merely an elaborate
political scheme to deflect criticism back upon the opposition. If so, we should know in the coming days and
weeks. If the payments do indeed come in, then Venezuelan bonds have been severely mispriced in recent
weeks and now constitute an excellent buying opportunity.
