(Adds details and context on credit rating)
By Brian Ellsworth
CARACAS, Sept 17 (Reuters) - Venezuelan bonds tumbled on Wednesday following a ratings downgrade by Standard & Poor's that further fueled worries about the country's capacity to service debt amid soaring inflation and economic contraction.
Investors have become increasingly concerned about the country's economy, which is widely believed to have slipped into recession this year, and worry that President Nicolas Maduro is delaying reforms needed to shore up government finances.
The country's benchmark Global 27 bond fell 3.3 percent, pushing its yield to 14.153. State oil company PDVSA's benchmark bond maturing in November 2017 fell 4.6 percent to bid 77.250 with a yield of 23.087 percent.
S&P said it cut Venezuela's long-term sovereign credit ratings to "CCC plus," pushing the country's bonds into the deep trenches of junk status. The rating implies "at least a one-in-two likelihood of default over the next two years," S&P said.
"While solid oil revenue (estimated at US$82 billion for 2014) will continue to provide dollar inflows, the government could come under greater strain to service its rising level of external debt maturities," it said.
The majority of emerging market sovereign credit ratings are below investment grade, with many Latin American countries in the lower levels of junk status.
Venezuela's top business group, Fedecamaras, estimates the economy shrank 4 percent in the first semester as businesses struggled to import raw materials and machine parts because of a dollar shortage caused by currency controls.
The central bank has not published first-quarter or second-quarter GDP figures, and routinely delays the release of inflation figures, with the annualized rate now topping 63 percent.
Industry associations say construction and manufacturing, both crucial to GDP expansion, have shrunk this year.
The overall index of Venezuela's bonds as tracked by JPMorgan has tumbled 19 percent since July.
Maduro says the situation is the result of an "economic war" against his government that is led by opposition business leaders with the backing of Washington.
Economists say restoring growth will require politically costly adjustments, including boosting heavily subsidized fuel prices and simplifying a three-tiered exchange rate, both of which are likely to spur inflation.
Investors were disappointed that Maduro did not take advantage of a cabinet shakeup this month to move on those measures.
The reshuffle instead moved Economy Vice President Rafael Ramirez to the foreign ministry, removing the government's most prominent advocate for market-based reforms.
Bondholders have also been alarmed by PDVSA's plans to sell its refining unit in the United States, Citgo Petroleum and its stake in the Chalmette refinery. Analysts see such moves as a sign the government is struggling to meet financial obligations, although the authorities deny that.
PDVSA is also seeking to sell its stake in the Hovensa refinery in the Virgin Islands, sources told Reuters on Wednesday. (Reporting by Brian Ellsworth in Caracas, Walker Simon and Daniel Bases in New York; Editing by Andrew Cawthorne, Andrew Hay, Andre Grenon and Peter Galloway)