=DJ Venezuela Debt Holders Rush For Exits As Banks Woes Surface

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(This article was originally published Thursday.)

By Kejal Vyas and Riva Froymovich
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--President Hugo Chavez's nationalization of four small banks and threats to seize more have spurred investors to offload Venezuela's sovereign debt, pushing risk premiums on the bonds to their highest levels in six months.
Worries are growing fast that Venezuela may be facing a liquidity crisis in its banking sector, sparking runs by depositors in some of the smaller, ostensibly less sound banks.
Instead of vowing that the state stands ready to inject liquidity into wobbly banks or otherwise provide them financing, as governments have in many other countries hit by the global financial crisis, Chavez Wednesday threatened to nationalize Venezuela's entire financial system, were there a full-blown banking crisis.
Venezuelans weren't reassured.
The country's bolivar currency weakened sharply against the dollar in black market trading, falling about 9%, to VEF6.1 per dollar. Last week, before the banking troubles began making headlines, it traded at VEF5.3 to the dollar.
As Venezuelans sought refuge in greenbacks, local brokerages were forced to meet demand by selling some of their dollar-denominated sovereign debt, pushing down bond prices. Foreign investors were also cutting exposure.
The risk premium on Venezuelan debt blew out 42 basis points, to 1,245 basis points over Treasurys, for a loss of 3.2% on the day, and putting it at a level not seen since mid-July. Venezuela's global 2027 bond fell 2 9/16 to bid 67, according to Reuters.
Venezuela's travails come just as markets are recovering from last week's selloff after Dubai World said it would restructure its outstanding debt, which left investors a little gun-shy and wondering about other potential market land mines.
Mark Dow, an emerging market portfolio manager at Pharo Management in New York, said some investors are selling Venezuelan debt to avoid further losses in the wake of the Dubai financial crisis. At some point down the road, "it's going to blow," Dow said of Venezuela. "It's just a matter of time."
Although crude-rich Venezuela benefits from oil revenues, the government spends heavily on social programs and saved little during boom years. Now that benchmark oil prices are almost half of their 2008 highs, Venezuela's finances are squeezed.
Moreover, given that Chavez has nationalized broad swathes of the country's economy - from energy and power to telecommunications, building materials and land - private capital investment has been scant in recent years.
With oil prices down, the economy has little to cushion its fall, and is on the skids.
Still, Piero Ghezzi, head of emerging market research at Barclays Capital, said his firm doesn't "expect Venezuela to explode." To the contrary, Barclays is "constructive on Venezuela," given the credit's high yield and the investment bank's view that the current problems will pass.
Near-term, though, Ghezzi expects the selling pressure to continue.
But buyers for one of the riskiest emerging market sovereign bonds are hard to find, which only exaggerates the debt's price swings lower.
Lured by the rock-bottom prices, the intrepid investor may take heart in the fact that Venezuela has never defaulted on its external sovereign bonds.
While the country's banking troubles are worrying, the market may be pricing in more bad news than may be justified, said Arthur Hovsepian, an emerging markets strategist at Los Angeles-based Payden & Rygel, which manages around $1 billion in emerging markets assets.
The low liquidity also makes it difficult to get a true of sense of where the price should be, Hovsepian said.
Regardless, Joyce Chang, head of emerging markets strategy at JPMorgan, recommends avoiding Venezuela. She doesn't expect a full-scale nationalization of the country's banking system, but does warn that some local banks and brokerage houses are in trouble.
That said, oil revenues, albeit reduced, still support the credit, she said, adding the current downdrafts should blow over in a couple weeks.

-Kejal Vyas, Dow Jones Newswires; 212 416 2185; kejal.vyas@dowjones.com
-Riva Froymovich, Dow Jones Newswires; 212 416 2217; riva.froymovich@dowjones.com
(Charles Roth contributed to this article)

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(END) Dow Jones Newswires
December 04, 2009 07:38 ET (12:38 GMT)
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