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which allows it to declare that it has withdrawn without triggering the covenants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.