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Venezuela's President Nicolas Maduro smiles during a meeting with the political alliance Gran Polo Patriotico (Great Patriotic Pole) in Caracas in this November 8, 2014 photo.
Reuters/Miraflores Palace
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FIRST OIL VICTIM

Venezuela has a 93% chance of defaulting on its debt

By Steve LeVine

Venezuela insists that it’s not defaulting on its billions in oil-backed bonds, despite reeling more than any petrostate in the rapid 40% plunge of global oil prices. But the investment community doesn’t believe this reassurance. Judging by the bond market, the probability of Venezuela defaulting on its debt is 93%.

The cost of Venezuela default insurance is now the highest of any country in the world. Investors must now pay $5.9 million in advance to insure against the default of $10 million of Venezuelan five-year bonds, plus $500,000 a year. That’s up from $894,000 in the summer, which was also regarded as high, and $2.7 million on Dec. 4. The implied probability of default is calculated from the default swap price.

The upside for investors is that Venezuela is now paying 22% interest on its benchmark 2027 bond. But in case things go bad, they are assembling a playbook on who gets what. One option is to buy “recovery swaps” (paywall) from Goldman Sachs, which allow a pessimistic trader to bet that Venezuela will default within a year or five years. If correct on the former version, the swap allows the recovery of 34 cents on the dollar of a Venezuelan bond. On a five-year version, the recovery would be 32 cents.

Although the six-month oil price plunge is mainly to blame for the country’s crisis at the moment, president Nicolas Maduro has been under pressure almost since taking power last year. Venezuelans have protested, and currently appear to be extremely angry about the state of the economy.