Will the looming Venezuelan debt default – set to be the largest and most chaotic in history – finally open investors’ eyes to the reckless risks they’ve been taking in their frantic hunt for yield? Venezuelan bond prices slumped on Friday after President Nicolas Maduro signalled the cash-strapped country was looking to restructure and refinance its foreign debt, estimated to be about $US150 billion ($200 billion).
Without a debt restructure, the cash-strapped country will likely be plunged into a complicated and drawn-out default, that could be even more destabilising for financial markets than Argentina’s $US80 billion debt crisis in 2001, which amounted to the biggest government default ever at the time.
There are fears the Venezuelan debt crisis could reverberate through global markets, as investors abandon other emerging countries such as Turkey, which are saddled with high levels of foreign debt. And this could trigger huge losses for hedge funds, which have borrowed huge amounts of yen or euros to invest in higher-yielding emerging markets. Some analysts warn a Venezuelan debt crisis could also cause investors to look more closely at the lofty prices they’ve been paying for US high-yield ‘‘junk bonds’’.
Some analysts warn investors are severely underestimating the risks involved with junk bonds. They warn that retail investors have poured tens of billions of dollars into exchangetraded funds that invest in high-yield bonds, but they warn these ETFs could suffer a major drop in liquidity if the $US1.3 trillion US junk bond market came under severe selling pressure.
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