Goldman Sachs' Venezuela Bond Bet Turns Sour - Report

Tom Burroughes

20 August 2018

Goldman Sachs and its clients face up $63 million or more of losses from the risk that the US investment and banking group took in buying into Venezuela’s debt last year, according to the Wall Street Journal.

The Wall Street firm bought about $865 million of debt from the Latin American country’s central bank; the deal will cause Goldman Sachs millions of dollars in paper losses, the report said. Goldman Sachs declined to comment to this publication today.

The potential losses of mutual funds operated by Goldman Sachs Asset Management are based on data from Morningstar, the fund tracking and benchmarking firm, the report said. The WSJ said across the board, market-value losses on the investment, which is held mostly in privately managed accounts for Goldman clients, likely exceed $250 million .

Family Wealth Report understands that a number of other major financial institutions own Venezuelan debt, so that this is hardly an issue confined to Goldman Sachs. The PDVSA 2020 bond is held by Blackrock, Fidelity, T Rowe, UBS, JP Morgan and HSBC, among other organizations, according to Bloomberg data.

Venezuela, while an oil-rich state, has plunged into civil strife and economic chaos under the hard-left regime of Hugo Chavez, and continues to languish under his successor Nicolás Maduro. Last Friday Maduro set out plans to curb hyperinflation, raising the minimum wage by more than 3,000 per cent and officially devaluing the already nearly worthless bolívar by more than 90 per cent. He additionally said in a televised address that the currency, which was already scheduled to shed five zeros Monday, would now be backed by Venezuela’s petro, a virtual currency linked to oil reserves that the government created in February and that experts have called a sham .

Venezuela under Chavez was once a darling of leftist academics, movie actors and politicians such as UK Labour Party leader Jeremy Corbyn, but on present form it is already an economic mess on a par with that of Zimbabwe, a country that is also blessed with rich natural resources but wrecked by decades of political mismanagement.

The scale of Goldman Sachs’ losses were calculated by the WSJ before Maduro announced the currency devaluation. The report said the losses show how Goldman Sachs took a significant risk in buying debt from such an embattled country. When it bought the bonds, they traded at 31 cents on the dollar – a fraction of their face value – and the firm marked them at 18 cents in June.

In May 2017, Goldman bought bonds with a face value of $2.8 billion originally issued by state oil company Petróleos de Venezuela or PdVSA, in 2014, the report said.

The WSJ said the firm declined to comment.

The MSCI Frontier Latin America and Caribbean Index of shares has slumped 49 per cent so far this year . Venezuela is not included in that index.