Venezuela’s Crass Credit Craving

Venezuelan bonds as top EMBI performers came under pressure for boycott or index removal, after leading houses were reported to have scooped up issues held by the central bank and other captive buyers at a steep discount through small specialist brokers. Goldman Sachs bought a $3 billion chunk at one-third the price through a London intermediary, and Nomura and Morgan Stanley were also involved in deals. Opposition parties in Caracas condemned the move and expatriate demonstrations were organized in Miami and Washington as a former Planning Minister, head of Harvard’s International Development Institute, referring to widespread staple food shortages, dubbed the instruments “hunger bonds.” He called for benchmark index removal as MSCI applied long ago for equities given pervasive exchange controls. Although international reserves are not formally divulged they are estimated in gross terms at $10 billion, roughly equivalent to import needs with scant cushion for debt-servicing. PDVSA has already executed a maturity swap which won bare acceptance with local investor control, and its future was further thrown into question with its chief executive due to depart. A President Maduro loyalist is set to fill the slot, who was previously in charge at US unit Citgo, which has pledged collateral both to bondholders and Russian partner Rosneft in case of default. The Treasury Department increased scrutiny of the relationship as the Trump administration debates sanctions against the regime after the President tweeted about a meeting with the spouse of jailed opposition head Lopez. Military support at home may be wavering as security forces demur at cracking down on street protesters, as Maduro’s bid for a hand-picked national assembly to rewrite the constitution and mollify popular outcry has met with sweeping criticism following the Organization for American States’ anti-democracy condemnation. The Chinese meanwhile are bracing for further losses on their $50 billion bilateral loans with unknown asset claims that could place them in direct conflict with other creditors.

Previous high-flyer Brazil has also lost favor, as MSCI equity gains fell to 3 percent through May, with the Electoral Court to determine whether President Temer received illegal campaign contributions after release of a payoff tape he claimed was “doctored.” Core PMDB party backing may no longer be assured as the stage is set for another potential impeachment. He promises to continue pressing labor and fiscal reform agendas, but major public pension overhaul in particular could be in danger with the budget deficit heading toward 10 percent of GDP despite renewed growth. The Temer recording allegedly came from one of the founding brothers of global meat supplier JBS, which faces bond and stock holder lawsuits after admitting to bribery and accepting a $3 billion penalty. Prosecutors got wind of wider misconduct after investigating inspector kickbacks for tainted products. Beef rival Argentina in contrast paced frontier markets with a 45 percent jump on possible track toward an MSCI upgrade in advance of primary elections before the October parliamentary poll. President Macri and his party intend to underscore economic success with the recession over and fiscal targets mostly honored with a one-time amnesty as $30 billion in capital has poured into one-month central bank bonds with yields over 20 percent. A new internationally-compliant consumer inflation gauge will be operational in July with likely IMF endorsement as the current administration craves its approval after a decade of resistance.