sábado, 20 de septiembre de 2008

CITIGROUP: Riesgo Venezuela alcanza los niveles del paro 2002-2003

Venezuela's 5-yr CDS spreads widened 409bp (to 1,067bp) over the last four days of trading, catching up close to Argentina's levels. In our view, outside the negative market sentiment and global risk aversion, the idiosyncratic reasons for the dramatic widening include the following fundamental, political, and technical risks.

On the fundamental side, the rapid decline in oil prices to US$96 per barrel has increased fears that it may fall further below a "breakeven" level. We calculate that if WTI oil prices fall beyond US$75 the country will switch from accumulating assets, to burning them. Assuming they do no significant expenditure adjustment or official devaluation, the country will likely be forced into a macroeconomic adjustment by 18 months. If they do adjust, their asset position would allow for more time, depending on the extent of such an adjustment. If oil prices remain above US$80, we believe the sovereigns ability to service its obligations is not under threat over the next two years, at least. However, we remain of the view that macroeconomic policies are not sustainable long term

On the political front, the temporary expulsion of the US ambassador and the corruption charges against individuals linked to the government, injected uncertainty to a highly risk-averse market. However, we are of the view that the nationalist actions are intended to attract political backing ahead of the November regional elections and will not result in material consequences. The threat to halt oil exports to the United States, expressed repeatedly, is unlikely to materialize as that would imply a halt of about 60% of the country's oil exports. Finally, the corruption charges remain at the individual level and do not involve formal sanctions to the state.

The technical issues involve the effect of Lehman's bankruptcy and the decisions on how to sterilize liquidity in the parallel market. On the former, the sovereign is negatively affected directly, through the Venezuelan public and private exposure to Lehman-issued structured notes, and indirectly, given the rebalancing in the international system because of counterparty default. In the Venezuelan system, we estimate Fonden may hold US$300 million of these notes, and the private sector may hold another US$400-800 million. Although the development is unwelcome, it is unlikely to trigger a systemic problem in the private sector, and in the public sector the effect is small (see total assets table below).

For sterilization and debt management purposes, renewed calls for buybacks, coexist with uncertainty on Boden sales revival, and/or new issuance. As the Boden sales have halted the supply of FX to the parallel market, the parallel exchange rate depreciated up to USD/VEF 4.75 from USD/VEF 3.5 a month earlier, despite increased dollar sales. We believe the government will not allow the parallel rate to continue depreciating for long, because of its effect on inflation. Thus, we expect the government may find a way to renew the Boden sales, embark on a combined buy-back and issuance, sell dollars directly to the system, or a combination of the above. All options are open as of yet, and we will continue to keep close contact with the Ministry of Finance in coming days to advise on new developments.

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