In case some readers have ever been tempted by the yields on high yield bonds and wondered what could go wrong, Venezuela’s latest travails provides a clear example.
Despite large oil reserves, in recent years citizens have experienced shortages of basic goods and services. The country’s GDP has been falling since 2013 and Venezuela now suffers from hyperinflation. The past two government administrations have experimented with economic policies over the last two decades and the results have not been dazzling.
This week Standard & Poor’s declared Venezuela to be in “selective default” (SD). Venezuela failed to pay $200 million in interest on two bonds due 2019 and 2024 within the one month grace period after the intended payment date. As a result, S&P lowered the ratings on these bonds to D (default) from CC while the country’s overall rating on all long-term foreign currency bonds has been lowered from CCC- to SD.