* Venezuela bonds had risen on hopes opposition would win
* Chavez had slimmer margin of victory than in 2006
* Many investors expect another election in a year or two
By Daniel Bases
NEW YORK, Oct 9 Venezuelan sovereign debt prices
fell on Tuesday after socialist President Hugo Chavez won
reelection, but the drop was limited because investors doubt he
is healthy enough to serve a full six-year term.
Investors betting on a victory for united opposition
candidate Henrique Capriles had fueled a rise in Venezuelan debt
ahead of the election. But Chavez's convincing victory by more
than 9 percentage points will allow him to continue his
self-styled socialist revolution.
Even so, Chavez has undergone three operations in Havana
since June 2011 for an undisclosed cancer in the pelvic region.
His illness was serious enough to curtail his campaigning in the
final weeks, and he has not groomed a potential successor.
"The market is expecting over the next one to two years
another presidential election," said Kathryn Rooney Vera,
macroeconomic strategist at BullTick Capital Markets in Miami,
referring to the possibility Chavez leaves office early.
Chavez has used revenue generated during Venezuela's 10-year
oil boom to support heavy spending on social programs while also
expropriating private businesses.
If Chavez dies or is declared incapacitated within the first
three years of his new term, Venezuela must hold a snap election
within 30 days. If he leaves office after four years, the
constitution states the vice president will take over for the
remainder of the term.
While Capriles lost by a wider margin than polls suggested,
it was a strong showing compared to the 25 percentage point win
by Chavez in 2006. The slimmer margin of victory reflects
growing frustration at unresolved problems such as crime,
blackouts, and corruption.
The U.S. Columbus Day holiday on Monday limited trading in
Venezuela's U.S. dollar-denominated debt, leading to some
pent-up selling pressure. But prices rebounded off session lows.
"There definitely has been a sell-off reaction, but I think
you would have seen a more precipitous collapse if it were not
for Chavez's health condition," said Rooney Vera.
Venezuela's oil wealth allows the government to keep paying
the debts that help fund its socialist agenda. So the country's
debt, which offers yields exceeding 12 percent, is attractive to
many investors at a time when benchmark 10-year U.S. Treasuries
are not even offering 2 percent.
According to traders, Venezuela's 2027 Global bond fell
roughly 3.5 points in price to bid around 87 with a yield just
under 11 percent. The 2022 Global bond dropped about 4 points to
a bid of 102.5 with a yield of 12.16 percent.
Overall the Venezuelan credit curve lost about 3.7 percent
in value on the day, having been up year-to-date on a total
return basis by about 30 percent.
Viewed in aggregate on the JPMorgan Emerging Markets Bond
Index Plus, Venezuelan credit widened by 48 basis points
to 952 basis points over comparable U.S. Treasuries.
Investors and analysts pointed to the health of Chavez as
the wild card in Venezuela. While his reelection preserved the
status quo, investors were encouraged by the cohesiveness of the
"That's a positive sign and means there is an organized
entity to can step in. Political transition always tends to be
messy and frankly if Capriles had won it would have been even
messier because it is unlikely Chavez would have gone quietly,"
said AJ Mediratta, senior managing director at Greylock Capital
Management in New York.
Opposition party candidates will face another test of their
cohesiveness in December's gubernatorial elections, which could
mean election-style spending and muted policy announcements
persist for the next two months.
Ahead of the president election, Venezuelan debt rose and
the cost of insuring against default dropped as Capriles made
progress in closing the gap. Some observers believed Chavez
could lose at the ballot box after 14 years in power.
Mediratta said the firm had lightened up its holdings of
Venezuelan bonds before the election, but is finding it hard to
buy back after the fact.
"It says there is not much follow through on the selling,
meaning the outcome is not that surprising," Mediratta said.
Still, the protection offered by credit default swaps became
more expensive in a knee-jerk reaction to the Chavez win.
Credit default swap spreads, which track how much investors
are willing to pay for insuring against a Venezuelan default or
credit restructuring, increased to 848 basis points from 773 on
Friday, according to Markit, the financial information services
That means the cost for an investor to insure $10 million
worth of sovereign credit is $848,000 a year for five years. A
year ago the cost was close to 1,200 basis points.