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UPDATE 1-Venezuela bonds sink after Maduro moves against retailers

Brian Ellsworth
Tuesday, 12 Nov 2013 | 1:50 PM ET

CARACAS, Nov 12 (Reuters) - Venezuelan bonds dropped sharply on Tuesday after President Nicolas Maduro ordered a military takeover of an electronics chain and authorities arrested dozens of people for purported price gouging.

Maduro's "economic offensive" to tame inflation running at over 54 percent has also included arrests of 28 people since Saturday for allegedly selling goods at "speculative" prices, sparking concerns about the overall economic and political panorama.

"(The bond price drops are) definitely a reaction to the perception that the government is ordering a semi-organized episode of looting," said one Wall Street source who asked not to be identified, referring to the government forcing shops to slash prices on goods deemed to be overpriced.

Venezuela's sovereign global bonds, which did not trade on Monday due to a market holiday, were down 5.71 percent, according to the JPMorgan EMBI+ Index's returns, compared with a drop of 1.04 percent for the broader emerging market index.

The benchmark Venezuela Global 27, due in 2027, was down 2.51 points, or 3.24 percent.

Soldiers over the weekend occupied stores of the Daka electronics chain, forcing it to sell products at cheaper prices and detaining several managers in a move echoing the confrontational style of late socialist leader Hugo Chavez.

On Tuesday, hundreds of people were still crowding around Caracas electronics stores, with police and soldiers deployed to maintain order. Prices are down between 20 and 60 pct after the government's "economic offensive," those in line said.

"Why are there lines? Because the people were being robbed and now have the capacity to make purchases," Maduro said during a speech at state oil company PDVSA.

Disputes over how much products should cost center on the decade-long exchange controls that provide dollars for imports at the official rate of 6.3 bolivars, even though greenbacks on an illegal black market now fetch more than 9 times that.

Government leaders say stores such as Daka acquire cheap dollars and then sell goods priced at the black market rate.

Business leaders say the currency controls are not providing enough hard currency, forcing many into the black market.

ELECTIONS LOOM

Shortages of consumer goods and soaring inflation have made the economy an increasingly important concern for Venezuelans, who on Dec. 8 will vote for mayors in municipal elections.

Maduro's campaign may help fire up his base in the run-up to that vote, which will be crucial for the ruling Socialist Party to maintain its control over the provinces.

"They say we're looters, but I just want to buy my family a nice television at a fair price for Christmas," said Luciano Alves, 29, a bakery worker in line at an electronics store.

"What's wrong with that? It's time to do something about speculation. I say we need a strong hand!"

Maduro calls the problems a product of an "economic war" backed by opposition leaders and adversaries in Washington. He has vowed to step up inspections of private businesses in the coming days to ensure they sell goods at "fair prices."

Critics say the situation is the result of a corruption-plagued exchange control system, a vast expansion of monetary liquidity, and intrusive regulations that limit productivity by stifling domestic industry.

The weekend was marred by looting in at least one establishment in the city of Valencia, where dozens of people were caught on camera running out of a well-known electronics outlet with flat-screen TVs and boxes.

The country's chief state prosecutor on Monday night said 50 prosecutors had been assigned to focus on usury crimes.

"Some of the headlines over the weekend related to government intervention in certain retail outlets, and subsequent reports of looting, seemed like a taste of a much less manageable social and political backdrop," said J.P. Morgan in a research note circulated on Tuesday.

It said it moved Venezuela from "overweight" to "neutral" in its EMBIG emerging market portfolio, for a variety of reasons.

The OPEC nation's high-yielding bonds have for years been a lucrative bet for investors despite the strident anti-capitalist rhetoric of late socialist leader Hugo Chavez.