A looming Venezuelan debt default is unlikely to trigger any domino effect in neighbouring economies as markets have long since priced in such an eventuality, economists say.
All alarm bells started ringing in the troubled South American country when the three major rating agencies -- Standard and Poor's, Fitch and Moody's -- further downgraded Venezuela's credit ratings.
They see it as "highly probable" that the OPEC member will halt debt repayments, a week after President Nicolas Maduro called for a refinancing and restructuring of the country's debt and Venezuela's state oil company PDVSA missed payment on a $1.1 billion bond.
Debt restructuring entails at the very least an extension of repayment deadlines, and frequently a partial write-off.
A group of creditors could declare the missed PDVSA payment a "credit event", thus triggering payment of credit default swaps that some investors buy to protect themselves, and would likely push the ratings agencies to further downgrade the nation.
If Caracas were to halt payments on all of its debt, it would be the biggest-ever state default, easily surpassing even that of Argentina which suspended repayment of $100 billion of loans from private creditors.
The combined debt of Venezuela and its state-owned oil company PDVSA is estimated at close to $150 billion.
- Nobody's surprised -
Neverthless, the markets do not appear to be untowardly worried about the prospect, since a possible default has been looming for a number of years.
"This has been a such well-flagged slow-motion deterioration, many people in the markets have been expecting Venezuela to default at some point," said Tony Stringer, managing director for sovereign debt at Fitch.
It's important to remember that the country's troubles are mostly home-made and due to "bad economic management by President Nicolas Maduro", added Venezuelan economist Orlando Ochoa.
"There is no risk of contagion," he said.
Neighbouring countries like Colombia have already absorbed the impact of a fall of their exports to Venezuela which has been cutting down on imports drastically for years to help with honouring its debts.
"There is, in fact, already a cordon sanitaire around Caracas which the Venezuelan government itself has put in place by limiting access to foreign currency, and therefore world trade, for businesses and individuals," said Christopher Dembik, head of economic research at Saxo Banque.
A sentiment echoed by the International Monetary Fund which last month said the impact of the crisis on other countries was likely to be "minimal".
Up to now, Caracas has managed to meet its debt repayments on time even as the price of oil, a mainstay of the economy, plummeted, and the economic crisis punctured growth and plunged the country into hyper-inflation.
"But Mr Maduro acknowledged last week that he wouldn't be able to keep up with the payments any more," said Ochoa.
- Russia and China are key -
A further complication is US President Donald Trump's decision in August to slap sanctions on Caracas, blocking investors from buying debt from the Venezuelan government or the state-owned oil giant.
Key to finding a way out will be Russia and China, Venezuela's two biggest trading partners, who also hold much of the country's debt.
Russia has already signalled its willingness to restructure Venezuela's debt, but has so far given no precise figures or other details.
"It will probably be the world's most complicated default and at the same time the one with the least worldwide impact," said Dembik.
A looming Venezuelan debt default is unlikely to trigger any domino effect in neighbouring economies as markets have long since priced in such an eventuality, economists say.
All alarm bells started ringing in the troubled South American country when the three major rating agencies — Standard and Poor’s, Fitch and Moody’s — further downgraded Venezuela’s credit ratings.
They see it as “highly probable” that the OPEC member will halt debt repayments, a week after President Nicolas Maduro called for a refinancing and restructuring of the country’s debt and Venezuela’s state oil company PDVSA missed payment on a $1.1 billion bond.
Debt restructuring entails at the very least an extension of repayment deadlines, and frequently a partial write-off.
A group of creditors could declare the missed PDVSA payment a “credit event”, thus triggering payment of credit default swaps that some investors buy to protect themselves, and would likely push the ratings agencies to further downgrade the nation.
If Caracas were to halt payments on all of its debt, it would be the biggest-ever state default, easily surpassing even that of Argentina which suspended repayment of $100 billion of loans from private creditors.
The combined debt of Venezuela and its state-owned oil company PDVSA is estimated at close to $150 billion.
– Nobody’s surprised –
Neverthless, the markets do not appear to be untowardly worried about the prospect, since a possible default has been looming for a number of years.
“This has been a such well-flagged slow-motion deterioration, many people in the markets have been expecting Venezuela to default at some point,” said Tony Stringer, managing director for sovereign debt at Fitch.
It’s important to remember that the country’s troubles are mostly home-made and due to “bad economic management by President Nicolas Maduro”, added Venezuelan economist Orlando Ochoa.
“There is no risk of contagion,” he said.
Neighbouring countries like Colombia have already absorbed the impact of a fall of their exports to Venezuela which has been cutting down on imports drastically for years to help with honouring its debts.
“There is, in fact, already a cordon sanitaire around Caracas which the Venezuelan government itself has put in place by limiting access to foreign currency, and therefore world trade, for businesses and individuals,” said Christopher Dembik, head of economic research at Saxo Banque.
A sentiment echoed by the International Monetary Fund which last month said the impact of the crisis on other countries was likely to be “minimal”.
Up to now, Caracas has managed to meet its debt repayments on time even as the price of oil, a mainstay of the economy, plummeted, and the economic crisis punctured growth and plunged the country into hyper-inflation.
“But Mr Maduro acknowledged last week that he wouldn’t be able to keep up with the payments any more,” said Ochoa.
– Russia and China are key –
A further complication is US President Donald Trump’s decision in August to slap sanctions on Caracas, blocking investors from buying debt from the Venezuelan government or the state-owned oil giant.
Key to finding a way out will be Russia and China, Venezuela’s two biggest trading partners, who also hold much of the country’s debt.
Russia has already signalled its willingness to restructure Venezuela’s debt, but has so far given no precise figures or other details.
“It will probably be the world’s most complicated default and at the same time the one with the least worldwide impact,” said Dembik.
