CS Frets Over Vene Solvency

Credit Suisse is recommending flat positions in Venezuela bonds after a decline in oil prices which could undermine the Andean nation’s solvency. The shop says it is cutting losses on a June 8 recommendation of long positions in sovereign 2023s hedged with 5-year CDS. “Our main argument for extending duration in Venezuela was the benefit the external and fiscal accounts would derive from the strength of global oil prices. The recent sharp drop in commodity prices has come at an inopportune time for Venezuela,” says the shop. After November 23 state and muni elections, Chavez aims to revive the constitutional reform process and boost the state’s presence in the economy. “The current oil price remains well above the 2007 average, and is still supportive of Venezuela’s external and fiscal accounts. However, new economic policy initiatives, lower growth and persistently high inflation are likely to raise the oil price threshold at which investors start being concerned about medium-term solvency in Venezuela,” says the shop. Credit Suisse recommends unwinding exposure to Venezuela, but still tips a short position in Ecuador 2030s versus short 10-year CDS in Vene. “The impact of a further potential fall in oil prices would likely be more pronounced on Ecuadorian asset prices,” says the shop.