Standard & Poor's has become the first ratings agency to downgrade Venezuela's credit rating to default status, following the country's failure to make two payments on its sovereign debt.
Venezuela failed to make the $200m owed in coupon payments for its global bonds due in 2019 and 2024 within the allotted 30-day time period, according to S&P.
Therefore, the ratings agency has downgraded the country's long-term foreign credit rating to ‘selective default' from ‘CC', while also lowering the rating of global bonds due in 2019 and 2024 to ‘D' from ‘CC'.
S&P said: "Our CreditWatch negative reflects our opinion that there is a one-in-two chance that Venezuela could default again within the next three months.
"We could lower specific issue ratings to default ('D') if Venezuela doesn't make its overdue coupon payments before the stated grace period expires, or upon the execution of the announced debt restructuring."
Venezuela has been struggling to make payments in recent months after US President Donald Trump imposed a ban on buying new bonds issued by the country in August, causing reserves to fall to near a 15-year low, according to Bloomberg.
The sanctions were in response to President Nicolas Maduro's move to consolidate his authority amid riots and a recession.
Maduro invited bondholders to Caracas on Monday for a meeting with government officials amid plans to restructure the country's debt. However, no proposals were agreed on how the government will renegotiate its $60bn debt burden.
After the meeting, spreads on Venezuela's 10-year bond widened 0.93% to VEF10.4 on Monday.
Venezuela has a 1.2% weight in the JPM EMBI Global Diversified index, which has around $330bn in assets tracking it and its sub-indices.
S&P said: "In our opinion, U.S. sanctions on Venezuela and government members will most likely result in a long and difficult negotiation with bondholders.
"We believe the government is less likely to default on its local currency-denominated debt, and President Maduro made no mention of any intention to restructure this debt. Therefore, our long-term local currency rating on Venezuela remains 'CCC-'."
Adrian Lowcock, investment director at Architas, said Venezuela was in a 'Catch 22' situation, as the sanctions imposed meant the US was banned from speaking to government leaders in order to sort out the issue.
"It was reasonably well flagged," said Lowcock. "The region has huge amounts of debt and has been struggling because of the weaker oil price for some time and it has not been well run from a budget perspective.
"Because it was well flagged, managers have curtailed their positions in Venezuela. Overall, it is a big issue for Venezuela, but will not have a significant impact for investors."
Abhishek Kumar, lead investment manager, emerging market debt at State Street Global Advisors, said: "This event has generally been expected and mostly priced in.
"It has been a slow death rather than a surprise default so the world has arguably already adjusted."
Claudia Calich, manager of the M&G Emerging Markets Bond fund, said: "It is not clear the formal default has been announced. This is S&P's interpretation that a credit event has happened however, International Swaps and Derivatives Association (ISDA) are yet to formally announce a default.
"The Venezuelan economic and political situation has been deteriorating for years so there should not be any surprises if and when a default occurs.
"We have seen a little bit of weakness in spreads of some regional countries over the last few days but I would not attribute it to a contagion risk."
In an environment where yields are so low, costs can make a huge difference to the outcome’
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