Will Venezuela Really Default on its Bonds?

One of the more amusing episodes over the past few days in the world of emerging-markets debt has been the storm in a teacup over the pledge by Venezuela's Hugo Chavez to withdraw from the International Monetary Fund. Christian Oliver has a decent overview in the Washington Post today, although you can take his hyperbole about Chavez triggering "a massive debt default" with a pinch of salt.

In reality, the situation is this: if Chavez withdraws from the IMF, he breaches a covenant in most of his global bonds. In turn that puts the bonds into technical default, which means that bondholders, if they want to, can get together to try to "accelerate" the bonds and make them due and payable, at par, immediately. I'm almost certain that Venezuelan withdrawal from the IMF would not constitute a "credit event" for the purposes of the credit default swap market.

What's more, bondholders are very unlikely to want to force Venezuela to pay back its bonds at par, seeing as how most of those bonds are trading well above par. One blogger does note that there are three bonds outstanding which trade below par, and that those bonds have a face value of $4.5 billion. But even in that case the chances of acceleration are slim. Venezuela is not going to unilaterally withdraw from the IMF tomorrow: chances are it will find some kind of legal workaround which allows it to declare that it has withdrawn without triggering the covenants on its bonds.