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MORE Battered By Low Oil Prices, Ven
ezuela Seeks Foreign Aid The clouds are darkening around Caracas. According to the Wall Street Journal, credit-default swap prices indicate that Venezuela is facing a 61 percent chance of default within the next year. Even if they can avoid the worst in the short-term, the Venezuelan government has a 90 percent chance of defaulting over the next five years. Bloomberg pegs the chance of default at a much higher 97 percent by the end of 2015. These projections are significantly worse than the 50-50 chance the markets figured only two months ago. Venezuela is in a much tougher position than some of its oil producing peers because its foreign reserves have fallen to dangerously low levels. Russia has had to sell off $80 billion in foreign exchange so far this year in order to keep the ruble from collapsing, but it still holds somewhere on the order of $400 billion in reserves that it can draw upon to weather the downturn. Venezuela, by comparison, may only have around $21 billion, the lowest level in years. That leaves Venezuelan President Nicolas Maduro with very little firepower to stave off a bond market onslaught. Venezuelan bonds fell to their lowest level in 16 years in mid-December after Maduro ruled out a scrap of fuel subsidies. They now trade at less than 40 cents on the dollar. Maduro says credit rating agencies Fitch slashed Venezuelas credit to CCC in mid-December are waging a vulgar, immoral blockade on the country. But without a rebound in oil prices, Maduro has few options left to avoid an economic crisis. Nevertheless, many market analysts think that default will be an option of last resort since doing so will inflict more pain than its worth. The cost of defaulting is still too high relative to the benefits, Carl Ross, an analyst at Grantham Mayo Van Otterloo Co., told the Wall Street Journal in an interview. Investors are expecting some sort of positive policy response that allows Venezuela to muddle through. Get The Brief. Sign up to receive the top stories you need to know right now. Thank you!
For your security, we've sent a confirmation email to the address you entered. Click the link to confirm your subscription and begin receiving our newsletters. If you don't get the confirmation within 10 minutes, please check your spam folder. MORE OPEC Calls For Widespread Production Cuts Still, while Maduro may successfully steer the ship away from external default, that may be of little solace to the average Venezuelan. As economists Reinhart and Rogoff note, the Venezuelan government is defaulting in numerous ways on its domestic residents already, including failing to pay for pharmaceutical imports, food, and unpaid bills to airline companies. Such domestic defaults also result in deeper and longer-lasting recessions and much higher inflation than from just external defaults alone, Reinhart and Rogoff say. In other words, Venezuela is already facing an economic crisis, it is now just a question of how bad it gets. This is why Venezuela was pressing OPEC members Saudi Arabia in particular to cut oil production so that prices would rise. But, on December 21, OPEC affirmed once again that it will not cut production and will instead let the market sort itself out. That, no doubt, is not welcome news in Caracas. This post originally appeared on OilPrice.com. Read more from Oilprice.com: Sanctions, Oil Prices Push Russia Into Currency Crisis Oil Price Winners And Losers In Latin America The OPEC Conundrum: Expect Production Cuts Before June 2015 Contact us at firstname.lastname@example.org.