Bloomberg News

Venezuela’s 55% Default Probability Overstated, BofA Says

September 20, 2011

(Updates with Finance Ministry’s no comment in fifth paragraph.)

Sept. 20 (Bloomberg) -- Traders are overestimating the probability that Venezuela will default on its debt, Bank of America Corp. said.

While the credit default swaps market is pricing in about a 55 percent chance that South America’s biggest oil producer will miss debt payments over the next five years, Bank of America analysts said crude prices above $80 a barrel are likely high enough to “sustain the inefficiencies caused by” President Hugo Chavez’s policies.

Venezuela “is experiencing what may be the largest oil windfall in its history,” Bank of America analysts Jane Brauer and Francisco Rodriguez wrote in a report. “When risk appetites return, Venezuela should be among the best, if not the best, performing assets” in emerging-market external debt, they wrote.

The cost to protect Venezuelan debt against non-payment for five years has risen more than 200 basis points, or 2 percentage points, in the past two months to 1,203 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Chavez’s drive to nationalize companies and his funneling of money to off-budget funds that have “virtually no mechanism of public accountability” are eroding confidence in the country, the analysts said. Still, they predict 2011 per capita oil revenue of $3,464, more than during the country’s 1970s oil boom and a figure high enough to help ensure debt servicing.

A Finance Ministry official in Caracas declined to comment.

--Editors: David Papadopoulos, Brendan Walsh

To contact the reporter on this story: Charlie Devereux in Caracas at To contact the editor responsible for this story: David Papadopoulos at

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