NEW YORK -- Venezuela's external funding gap implies it is highly unlikely there will be sufficient hard currency available to fully redeem debt service obligations this year, said Moody's Investors Service. Still, the ratings agency noted that a default could be avoided.

In a new report, Moody's examined the relationship between the government of Venezuela (Caa3 Negative) and Petroleos de Venezuela (PDVSA, Caa3 negative), analyzing how a potential credit event could play out in the near future with a focus on PDVSA's role as a possible trigger of a credit event involving the sovereign.

The relationship between the two is complex and intertwined, with the sovereign's indirect ownership of oil assets -- the main source of hard currency inflows into Venezuela -- via PDVSA.

"Of the two debt issuers, PDVSA and Venezuela, the oil company is more likely to default first given that it owes significantly more than the sovereign in debt service in 2016-2017, with large payments due this year," said Moody's Vice President Jaime Reusche.

PDVSA's hefty payment calendar through 2017 includes almost $4 billion in debt service in Q4 2016 when $3 billion in principle payments come due: $1 billion in October and another $2 billion in November. By contrast, the sovereign has only interest payments due on its global bonds from now through the end of 2017.

The report acknowledges that a default by the PDVSA would very likely be followed by a default of the sovereign as well.

In the event of a credit event, Moody's expects losses to be in the vicinity of 35% in net present value terms, which is consistent with the sovereign's and PDVSA's Caa3 rating. The rating agency noted its negative outlook on both ratings acknowledges the degree of uncertainty involving potential losses in the event of default.

While less likely than a default in its view, Moody's said there is a non-negligible probability that a credit event related to both Venezuela and PDVSA could be avoided altogether. The sovereign could avoid being caught in a debt restructuring of PDVSA if the latter's maturities are restructured under relatively favorable terms for bondholders. For both issuers to avoid default, Moody's analysts said several factors would need to converge.

"For both the sovereign and PDVSA to avoid default, the external funding gap would need to narrow materially either as a result of additional financing and/or debt relief from China, and/or higher oil prices," said Reusche.