By Laura Cochrane

Feb. 16 (Bloomberg) -- Venezuela’s bonds, trading at half their value of a year ago, fell after President Hugo Chavez won a referendum allowing him to serve another 10 years and extend his drive to turn the oil-producing country into a socialist state.

The price on the government’s benchmark bonds due in 2027 was quoted at 51.42 cents on the dollar at 1:36 p.m. in London, down from 51.90 cents on Feb. 13, according to prices on Bloomberg. The yield on the debt rose 0.122 basis points to 18.646 percent, almost double the 9.338 percent yield from February last year. A basis point is equivalent to 0.01 percentage point.

Voters scrapped constitutional term limits that would have forced Chavez from office in 2013, casting 54.4 percent of ballots in favor of the amendment and 45.6 percent against, according to the National Electoral Council. Without a constitutional check on his power, Chavez, 54, may stay in office indefinitely, opposition leader Leopoldo Lopez said.

“It does present a grey political scenario: that Chavez will be there forever,” said Luis Costa, an emerging-market debt analyst at Commmerzbank AG in London. “It’s an extremely shaky scenario to go long Venezuela bonds, especially with the prospect of oil trading in the low 30s.”

The combination of Chavez’s political strategy and the 74 percent plunge in oil from a July record is increasing investor concern about the country’s ability to pay its $46 billion of debt. Venezuela, the biggest oil exporter in the Americas, raised government spending to the equivalent of 36 percent of gross domestic product in 2007 from 23 percent in 1998, according to Standard & Poor’s.

Venezuela depends on oil for 93 percent of export revenue and half the government’s budget.

Higher Yield

The amendment allows Chavez, a former Army lieutenant colonel who first took office in 1998, to seek re-election as many times as he wants. The next presidential election is slated for 2012. Chavez, whose began his political career after leading a failed coup attempt in 1992, says he needs to rule beyond 2012 to carry out his “socialist revolution.”

Investors demand about 18 percentage points more in yield on average to hold Venezuela’s dollar bonds rather than comparable- maturity U.S. Treasuries, according to JPMorgan Chase & Co. That’s more than four times the 4.25 percentage-point average yield spread for Brazil’s dollar bonds. Dollar-denominated bonds sold by Argentina, which defaulted on debt in 2001, carry yields on average 16 percentage points more than Treasuries, JPMorgan data show.

S&P lowered Venezuela’s debt rating outlook to negative from stable on Dec. 10, saying the referendum will cause Chavez to put off “needed adjustments in economic policies.” S&P rates Venezuela’s foreign debt BB-, three levels below investment grade. Moody’s Investors Service, which rates Venezuela’s debt five levels below investment grade at B2, removed it from review for a rating increase on Jan. 15.

“We don’t expect any rating downgrade out of this,” Costa said.

To contact the reporter on this story: Laura Cochrane in London at lcochrane3@bloomberg.net