(Bloomberg) -- Hopes that Donald Trump’s presidential win would mean a fresh start for US policy toward Venezuela are starting to fade.
Investors betting on Trump overhauling negotiations to solve the political stalemate in the South American nation received a blow after the US president-elect picked Senator Marco Rubio to be the next secretary of State. A staunch advocate of tougher sanctions on the Nicolas Maduro government, Rubio represents for many a throwback to a failed hawkish policy, reducing odds of a potential deal.
His appointment was the first in a series of signals on the return of the strategy that dominated the Venezuela policy during Trump’s first term. The so-called “maximum pressure” approach included a tough set of economic sanctions and the recognition of a parallel government led by former National Assembly president, Juan Guaido.
“Signs from Trump appointees suggest a worst-case scenario reminiscent of the early Guaido era,” said Guillermo Guerrero, a strategist at EMFI Securities. “But ‘maximum pressure’ already failed once and is unlikely to be effective this time.”
Trump also chose Mike Waltz, another Maduro critic, as his national security advisor. Waltz is co-sponsoring a bill known as the BOLIVAR Act, which toughens restrictions on entities dealing with the Venezuela government without a US license.
Venezuela’s defaulted dollar notes have lost more than a cent across the curve since Rubio’s appointment, with losses mounting after the BOLIVAR Act passed the US lower house of Congress a few days after. Sovereign notes are trading at around 14 cents, while PDVSA’s notes exchange hands for 10 cents or less.
The decline is “clearly a sign that some people are not that positive about a Trump normalization with the Maduro government,” said Francesco Marani, head of trading at Spanish boutique investment firm Auriga. “It’s difficult to predict where the bottom could be.”
A Short-Lived Rally
It’s a turnaround from the days leading up to the US election, when Venezuela was seen benefiting from a Trump victory. The hope that Trump could break a political stalemate that had been brewing under the Biden administration sent government bonds rallying to as high as 17 cents.
Ramiro Blazquez, head of research at BancTrust & Co. says it’s still premature to rule out a negotiation under the new US government.
“It’s simplistic to think that he will repeat the path,” Blazquez said of Trump. “Continuing with the Democrat’s policy would have extended the status quo without reaching any kind of definition.”
Even before Trump takes office, the Biden administration is increasing pressure in its final stretch. On Nov. 27, it sanctioned 21 officials it said supported Maduro’s effort to defy results of a July’s presidential election, which the country’s opposition and Washington say he lost.
Maduro’s current term ends Jan. 10, posing an early test for the incoming US administration, with both Maduro and the opposition claiming victory.
Money managers had bid up prices of Venezuelan bonds earlier this year after JPMorgan Chase & Co. re-introduced the debt to its indexes, which most emerging-market investors follow as a benchmark for their portfolios. The notes also rallied ahead of the country’s July election, on hopes of a regime change or that Maduro would gain US recognition from a fair election.
Now, further escalation of sanctions would likely pose downside risk on the bonds. The government has been in default on overseas debt since 2017 and owes more than $150 billion to foreign lenders, according to economist tallies.
“Without a path to normalization and restructuring, the credit will remain under pressure,” Guerrero said.
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