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CARACAS, Oct 18 (Reuters) - Venezuela's bond prices fell on Tuesday after state oil producer PDVSA again extended a deadline for its $5.3 billion debt swap offer and warned that if the operation failed the cash-strapped company might struggle to pay its debt.
The swap offer was designed to ease operations at the company heaving under low oil prices, slumping production and an extreme cash flow deficit that has left it unable to pay contractors on time.
But low participation led PDVSA to sweeten the exchange's terms, extend deadlines and, on Monday night, warn that it "could be difficult" to pay bondholders if the operation flops.
The swap allows investors to exchange bonds maturing in 2017 for a new bond maturing in 2020 that is backed by shares in PDVSA's U.S. subsidiary, Citgo Holdings Inc.
The swap deadline was extended from Monday to Friday.
The cost of a default would be steep for PDVSA and the market largely sees its comments as an attempt to push participation to the 50 percent threshold.
"They're trying to scare the market," said one fund manager, adding he did not think the strategy would work. "They know the cost of not paying is much higher than the cost of paying."
President Nicolas Maduro has insisted Venezuela and PDVSA will make all debt payments and dismissed default talk as part of a politically motivated campaign against his socialist government.
Sources said central bank president Nelson Merentes reiterated Venezuela's willingness to pay in a rare private meeting with investors in Washington this month.
The benchmark PDVSA 2022 bond was off 3.500 points, or 5.85 percent, to a price of 59.800, according to Thomson Reuters data.
The two bonds part of the swap operation were barely budging. The 2017 bond maturing in April gained 0.24 points to a bid price of 80.010, though the 2017N bond dropped 2.010 points to a bid price of 86.000.
The swap was meant to ease significant payments including a $2 billion amortization in November and $5 billion in amortizations due in 2017.
But if participation in the swap is low, bond prices will likely fall further and PDVSA will not get as big a financial breather.
"We assume that these threats represent a negotiation tactic to encourage participation," said Siobhan Morden at Nomura Securities International, adding she could not rule out less commitment to paying debt down the line.
"The reluctance of PDVSA to alter the terms and further improve the exchange ratio is worrisome as it does not show flexibility of respecting market forces to provide the necessary terms for a successful exchange," Morden said. (Reporting by Alexandra Ulmer; Editing by Will Dunham)