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Debt end

8 May 2012 By Raul Gallegos

The health of Hugo Chavez has piqued the market’s interest. Long stretches of silence from the cancer-stricken Venezuelan president have brought a certain morbid optimism to investors, who have sent the country’s debt to highs not seen in years. But any new regime will still have to wrestle with the legacy of backwards Chavez policy. Unwinding years of economic mismanagement won’t be easy.

In anticipation of Chavez’s possibly bowing out of upcoming October elections, Venezuela’s sovereign debt has surged by 23 percent this year, far outpacing the JPMorgan EMBI global index of emerging bonds, which is up just 6 percent. And while the country’s high level of debt issuance made its credit riskier than Argentina’s earlier in the year, Venezuela’s five-year credit-default swaps have tightened considerably and now trade some 200 basis points lower than that of its fellow South American state.

What’s more, the traditional Chavez discount – created by his financial policies, lack of transparency and high deficits even with soaring oil prices – is gone. Venezuela’s 2022 bonds now sell at a rather rich premium.

But investors are getting ahead of themselves. For starters, Chavez still has an edge. Even while fighting the cancer that has curbed his normally frequent public appearances to sporadic tweets, Chavez is as much as 13 percentage points ahead of opposition rival Henrique Capriles Radonski. And though polls indicate Capriles would be a front-runner if Chavez were to throw his support to Foreign Minister Nicolas Maduro, his lead would be narrow.

A Chavez defeat also wouldn’t necessarily clear an easy path. Chavistas would still control the Congress until 2015. This would be sufficient power to tie up the plans of any new president, including issuing new debt or refinancing older paper, making Venezuela’s financial policies unpredictable.

Opposition leaders have given investors fair warning. They concede that unwinding Chavez’s age-old capital controls would take time. The state’s massive spending on social programs also probably wouldn’t go away any time soon. And just how far a new government could cut social programs without a backlash isn’t clear. A post-Chavez Venezuela is almost certainly good for investors, but it’s no immediate bonanza either.


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