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Bolivian bonds should carry a health warning

Buyers have been too soft on Bolivia's first international bond issue in 90 years. The Andean nation's $500-million (U.S.) issue yields just under 5 per cent. That's less than half what investors charge richer Venezuela on similar debt. But they may be putting too much faith in President Evo Morales. They'd better hope the Bolivian President respects debt obligations more than private property.

Enthusiastic investors placed $4.5-billion-worth of bids for this week's issue, nine times the amount on offer. For sure, it has scarcity value. For now, Bolivia's debt-to-GDP ratio, at about 30 per cent, is also below Venezuela's at roughly 50 per cent. And Mr. Morales' policies have achieved single-digit inflation and rising foreign reserves. Partly as a result, Fitch Ratings pegged Bolivia's bond at double-B-minus, a notch above Venezuela, a country that despite the unsustainable economic policies of freshly re-elected President Hugo Chavez is wealthier and has a proven debt payment record.

So far, so good, perhaps. But the risks are plentiful. For one, Bolivia has seen more than 150 coup attempts since it became independent in 1825. It had five presidents in the four years before Mr. Morales came to power in 2006. It has also suffered episodes of economic implosion, with inflation rising above 20,000 per cent in the mid-1980s.

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Moreover, Bolivia is an untested borrower. And though his economic results have been far better, Mr. Morales shares statist tendencies with Mr. Chavez. He has nationalized Bolivia's oil, gas and power distribution sectors. He also had the state take over mining operations this year following calls from unhappy miners. How he might treat bondholders under stress is a big uncertainty.

Such stress could follow from any problems with natural gas exports, which account for nearly half Bolivia's export revenue. There are only two customers, Argentina and Brazil, and further economic deceleration in either place could hurt. And Bolivia hasn't invested enough in energy exploration to replenish reserves. Laws governing energy, mining and investment are all pending. Even Venezuela offers foreign energy partners greater legal certainty. Investors in Mr. Morales' new bonds may be forgetting how quickly Bolivia could start looking less creditor-friendly.

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