Emerging Debt-Venezuela crisis in focus, trading tapers off

Reuters, 12.30.02, 2:24 PM ET By Hugh Bronstein

NEW YORK, Dec 30 (Reuters) - Emerging market sovereign bond trading ground to an early close on Monday as investors worried about what 2003 might bring Venezuela, where a month-old strike has nearly shut down the economy.

Trading was light ahead of the new year -- one trader commented that he did not even have his computer screens turned on -- even as the political turmoil in Venezuela, the world's fifth-largest oil exporting nation, deepened.

"Venezuelan bonds are vulnerable to more weakening because the situation in the country is deteriorating," said Lawrence Krohn, head of Latin American sovereign research at ING Financial Markets.

The opposition threatened on Monday to add more civil disobedience and a tax boycott to a work stoppage that has blocked oil exports but so far failed to make President Hugo Chavez resign.

The leftist leader has thumbed his nose at massive marches, one of which brought a million demonstrators onto the streets of Caracas.

"There's no chance of a near-term resolution," Krohn said. "Chavez is getting angrier and angrier and the people of Venezuela are getting poorer and poorer."

Emerging market bond spreads widened by 10 basis points to 783 over U.S. Treasuries, according to JP Morgan's Emerging Markets Bond Index Plus. Venezuela's portion of the index widened 16 basis points to 1,120.

Wider spreads reflect the perception of increased risk as measured against safe-haven U.S. Treasury bonds.

The opposition demands immediate elections and has refused Chavez's offer of a referendum on his rule in August, which he says is the earliest date allowed by the constitution.

Chavez was elected in 1998 after a campaign in which he vowed to wrest control from the country's corrupt elite and enact reforms to help the poor. But opposition has grown amid charges the president wants to establish a Cuban-style authoritarian state. Many investors say Chavez, notorious on Wall Street for his failed economic policies and anti-capitalist rhetoric, is probably on the way out and that Venezuelan bonds are poised to rally, as happened in April following a short-lived coup against Chavez. But investors are fooling themselves if they assume Venezuela will undergo an instant economic renaissance when and if Chavez is pressured out of office, Krohn said.

"It is not as if there is some very competent leader who is poised to take over. The opposition has nobody like that," he said. Venezuelan debt has rewarded holders with total returns of 18.79 percent in 2002, compared with the 14.16 percent rise in the overall market, according to the EMBI-Plus. But as the strike eats into the country's oil and Christmas season tax revenues, Venezuelan total returns have dropped 3.29 percent so far in December.

BRAZIL AWAITS LULA'S INAUGURATION The market will watch for any signals on Brazil's future economic policies from President Luiz Inacio Lula da Silva, who takes office on Wednesday.

The one-time radical union boss turned his rhetoric toward the political center to win October's election. Now investors want proof that Lula will properly manage Latin America's biggest economy. Brazil's central bank forecast 2.8 percent growth in gross domestic product in 2003, up from an estimated 1.6 percent this year.