S&P to Maduro: down you go

Pray for a miracle, douchebag.
Pray for a miracle.

Standard & Poor’s downgraded Venezuela’s debt from junk to useless junk.

Why should you care? Because the lower our debt rating, the higher the interest rates we have to pay when we take out loans to pay for election binge spending. In other words, your grandchildren just got poorer, courtesy of S&P.

I think it’s significant that the ratings agency points to internal conflict within the chavista government as its greatest weakness – good to remember when Maduro tries to blame the chaos on us. It also says it expects high inflation and no growth this year, and that if the government were to implement the measures it needs to – read between the lines: eliminate the gasoline subsidy – it may not have the political capital to do it, in which case they would downgrade us even more.

Finally, the money quote, pointing to the deterioration of economic conditions in the country:

The cost to insure Venezuela’s debt stands at 1,047 basis points, up from 965 on Friday and far above the 645-point level at the start of this year, according to Markit. Venezuela’s benchmark 2023 dollar bond now trades around 85.5, yielding 11.49%. Don’t be surprised if that yield soon starts rising far higher.

But I guess this doesn’t matter because we have the FAO saying we’re doing great.


  1. “your grandchildren just got poorer, courtesy of S&P.” don’t think so…courtesy of Chavez and his “management” team…..

    • The ‘cost to insure debt’ is the cost of buying a Credit Default Swap (or some other financial insurance instrument) and so it works as a metric of country risk. In our case, the CDS spread (with respect to a minimum-risk country, usually USA) went up 66% since the beggining of this year, which means the relative risk of investing in Venezuela, as perceived by the markets, has risen in that amount.

      The second fact is way more direct: the Venezuelan government is paying 11,49% interest on dollar-denominated debt, which is actually a higher rate than the one on Greek debt now (10,4%)

      • The riskier a country is, the higher the interest rate said country has to pay in order to get financing. And since Venezuela is ALWAYS looking for financing (because our politicians think we can live beyond our means forever) then … our interest rates went up.

    • The Venezuelan economist Alexander Guerrero makes the point that it’s difficult for countries like Venezuela to hide their economic numbers. The numbers and internal banking data are followed closely throughout the international financial community. The guy who works for Bank of America, Rodiguez, makes a living staring at the nuances of Venezuelan economic data all day long. They know. They’re on the phone all day long talking about numbers. That last paragraph that you refer to signifies that the cost of ‘insuring’ the purchase of old/new Venezuelan bonds has substantially risen. Why? The number mavens of Wall Street see the internal numbers, or can make an educated guess as to what they really are. When the ‘basis points’ rise, as noted above, the cost for insuring bonds rises in accordance. Greater risk. The point of Standard and Poors lowering the credit rating? Venezuela is in serious economic decline. Pay attention.

      • shhhh, TMI. You’ll induce shock in those who are on the verge of waking from their hypnotic stupor for the past 14 years. You know, the Arturos, the yoyos, the AlanWoodses, and the rest of their ilk.

  2. >>> … Don’t be surprised if that yield soon starts rising far higher. <<<
    The country could go bust, declare bankruptcy, join the argentina club.
    Bonds are not always a sure investment, and have been disowned over time.

    • A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full. It may be accompanied by a formal declaration of a government not to pay (repudiation) or only partially pay its debts (due receivables), or the de facto cessation of due payments. (Another name is national insolvency if default is not willful, for instance when total debts are more than total assets.) Most authorities will limit the use of “default” to mean failure to abide by the terms of bonds or other debt instruments. Countries have at times escaped the real burden of some of their debt through inflation. This is not “default” in the usual sense because the debt is honored, albeit with currency of lesser real value.

      • in 2008,
        insuring AAA [triple A] financial instruments became a myth.
        It resulted in the threat of total collapse of large financial institutions,
        the bailout of banks by national governments,
        and downturns in stock markets around the world.
        Insurance is a derivative, backed by good faith.
        And, there’s not much of that in our world [good faith].

        • The overnight rate is generally the rate that large banks use to borrow
          and lend from one another in the overnight market. So when
          the overnight rate rockets, it will be time to llamar a María..

  3. EC, the cost of insuring Venezuela’s debt against default is roughly 10.5% (each basis point is 1/100 of 1%), or only a little less than your 1-year benchmark bond interest yield would be.= high market expectations of a risk of default in the near-term future. I might add that this still understates the real risk, since BCV international reserves are at least 15-20% less than stated, or really at $21-22 billion, versus stated $26 billion, when gold is marked to market after its recent 20% or so drop (gold is 80% or so of international reserves, was carried at a 3-month moving average, which after the recent drop would put it at some $1350, or some 15-20% less than current stated $26 billion of international reserves.) The current “implicit” exchange rate of 31 is really at about 36. And, I don’t buy the recent press headline of Govt. offshore $20 billion or so in “shadow” off-the-radar accounts, since, if they existed, Venezuela would not be suffering large-scale shortages of consumer/industrial goods.

  4. In other words, your grandchildren just got poorer, courtesy of S&P.

    As others have noted, this is like blaming the weather reporting service for rain.

    El Cachaco: When one buys a bond or other debt instrument, one runs the risk that the debtor will default on the instrument, or go bankrupt and be unable to repay. One can buy insurance against that risk. If the debtor is, say, Apple Computer or Saudi Arabia, the risk of default is tiny and companies offer the insurance at low cost. If the debtor is an unstable government which is spending at unsupportable levels and has accumulated debts approaching or exceeding its revenues, the risk is high and the insurers against it charge more. The cost of insurance is figured in “basis points” (0.01%) of the principal per year of coverage. The cost of insurance on Venezuela’s sovereign debt was 6.45% at the start of the year, and is now 10.47% – having climbed 0.82% from Friday to Monday.

    The point about bond price and yield is similar. The price of a bond is offset from par (100) in relation to the face yield of the bond relative to current interest rates. If the “money market” rate is 3%, a bond with a face yield of 5% will be priced over par; a 2% bond would be priced under par. (As the bond approaches maturity, when it will be redeemed for the full principal, its price converges to par.) The price of the bond also includes a discount for the risk of default; this increases the effective interest rate paid, compensating the buyer for the risk.

    Venezuela has issued lots of dollar-denominated bonds paying 9.824% face. This is more than triple recent “money market” rates, which means there was about 67% discount for risk at the face value. But now the market estimates the risk even higher, with the price discounted another 14.5%. This increases the effective yield on the bonds. The predicted higher yield means further drops in the price.

    Venezuelan sovereign debt now sells for about 1/4 of what it would bring if investors trusted the Venezuelan government to honor it.

    • I actually disagree with this. S&P’s actions have a direct effect on the interest rates we pay. Sure, their job is to call it like they see it, but there is also an element of subjectivity involved. Let me put it this way: had S&P not done this, our interest rates wouldn’t have risen.

      • Let’s put it another way.

        The Happy Dales resort gets more customers on bright sunny days, and fewer customers on cloudy rainy days.

        Most customers don’t drive out to Happy Dales to see if it is raining. They check the weather service. If the weather service predicts that it is going to rain at Happy Dales, they don’t go.

        If the weather service didn’t predict rain, more customers would go out to Happy Dales, patronizing whaterver indoor attractions are there. Thus the bad weather report could be “blamed” for a drop-off in business. But over time, disappointed holidayers would stop going.

        The relationship between bond sellers and S&P is analogous to the relationship between resorts and the weather service. In the short term, the bad news can be withheld, and the seller’s business sustained. But the messenger doesn’t create the bad news.

        S&P’s ratings are less rigorous than a weather report; they are predictions, not reports. But S&P doesn’t (or shouldn’t) shape the conditions that its ratings reflect.

  5. OK I get most of this but, what’s the bottom line – how many more $s will it cost the nation anually moving from a B+ to B?

    • Not necessarily a lot. It just moved one step lower on the ladder towards default status. Either rating is considered a “junk” bond, or, a bond having a higher risk of default and thus necessitating greater yields.

      To put it into comparison of American credit ratings for consumers, Venezuela has a subprime (<640) score. Say that the Venezuelan score was 620, well, now its 610. They are excluded from raising money at the cheapest rates, but not completely cut off from the markets. The real takeaway here is that there is an increased risk…but not hugely so. The better metric is always the derivative valuation of swaps, which was kindly included in the article and well explained by Daniel Urdaneta.

        • Well there is one real important thing to remember about post-issuance changes in bond ratings: They may impact present prices of existing bonds and future coupon yields of new issues. Existing coupon payments remain the same insomuch that the changes in yield are always reflective of price and in that we see the demand mechanism coming into play. When existing bonds become illiquid, then you have a real serious indicator of a problem with a country/company/whatever’s ability to fund itself down the road.

  6. I’m curious – although it makes perfect sense that the CDS ratings make a nicer metric for the overall perception of risk in the market, all these play together to triangulate a general average consensus. In so far as they do, how do we feel about the EMBI+ spread?

    • If you look at the bond markets over the past few weeks on the EMBI+, Venezuela has tracked reasonably closely with movements in the overall LatAm index along with Brazil. The only real difference is in the shift in overall bp, but it has been consistent. The S&P downgrade, given the complete lack of economic policies coming out of Venezuela, is hardly surprising since the current trajectory is simply not sustainable. In Maduro, Venezuela has received the worst possible option for a leader at a time of economic crisis; something I think he is wholly unprepared for intellectually, which will lead him to follow his cadre which is far more ideologically oriented and thus dooming the economy for the forseable future.

      Ironcially, had it been Cabello in charge, I think we would have seen some real changes and possibly even favorable movements, given his lack of love for Cuba and at least a moderate understanding of business, economics and that ideology can kill a golden goose. I don’t think that we would have seen the recent spikes in CDS pricing, for that matter, either. Moreover, I think he understands that paying the bonds is important; to pull an Argentina and become cutoff from international capital would broker insanity whereas Maduro and company likely believe the parasites in ALBA/PetroCaribe/Mercosur would come running to the rescue in a sign of socialist solidarity, when they’d actually only do so to pick the carcas over one last time.

      As for the flow of capital out of the emerging markets, much of this is systemic. For the past several years, created money has been flowing into the developing markets as investors, largely institutional, have been chasing returns. Now, as the apparent end of QE3 is drawing nigh (despite personally being largely opposed to the whole Benny and the Inkjets motif that has been on display throughout the quantitative easing dance) its interesting that they are making much in both at the Fed and in the markets of its end given that inflation is below and unemployment is above their nominal long term targets. The resulting upward pressure on yields is drawing some of that money back into the US domestic market or chasing equities since they’ve had a reasonable run over the last 12 months and the sense of systemic risk is on the decline.

      I’m sure more of that will be revealed around 2 PM EDT this afternoon.

      Abridged version? Bond markets in general are going to be soft for the next little bit, barring a lot of volatility, or at least much more than we’ve seen recently. Equities may be in the midst of a bubble, since financially the news looks good, but still seems to be on wobbly tangible legs. As for Venezuela, whatever bond issue they may be looking at, and I think they have to be looking at, will be poorly received and I think it will precede a devaluation by a few weeks. The people who have the power are either too economically ignorant, too ideologically committed, or too politically corrupt to make the necessary changes to save the economy, regardless of Leon’s cheery statements on Bloomberg to contrary.

      I’m actually vividly reminded of late 2007 when folks I knew, who had 6 digit incomes, were spending money like it would never run out and were living effectively paycheck to paycheck assuming that nothing would ever change and never worrying about next week or next month as long as they were enjoying the moment. It only takes one black swan to ruin everyone’s day.

      • Thanks for the wonderfully thought out reply. IMO the situation out of Caracas (and I agree we have yet to see a lot more critical fumbles as the year drags on) is akin to when I was 7 years old and played with a leaking soccer ball, I kept kicking it and kicking it until it was more frisbee than ball. Every whack they take at it jingles across a lot of pockets my friend.

  7. Yes, we have to thank S & P for the downgrade after the credibility it gained by rating Lehmann Bros. and sub prime packaged mortgages as AAA just before the crash in 2008.

    And, yes, JC – the FAO words ARE far more important tan macroeconomic figures. You cannot fill your stomach with such abract figures, but you certainly can eat and arepa or a cachapa!

    Thanks for the information on the rise in points to insurance our debt – I hope it is not with AIG….. 🙂

    • Learn to enhance your credibility by correctly spelling Lehman, you tool. And yes, words do wonder for digesting what is not available on market shelves. Not that you would know, ensconced as you are, far from the Venezuelan reality.

      Like yoyo and Alan Woods and the lot, you’re another one needing wet-nurse philosophies to sustain a dream-world …

    • Right, FAO gets the figures from our trustworthy government, that paragon of unbiased information.

      Plus the figures are from 2011, nothing remotely like today.

      Put that in your cachapa, R2D2.

  8. As I understand it, the lack of basic goods on the shelves has had a positive effect on the trade balance. People eating less, has a good economic effect. I suppose people dying might even have a better effect.

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