Emerging Debt-Brazil rises as mkt smiles on Lula, for now

Reuters, 01.06.03, 12:44 PM ET By Hugh Bronstein

NEW YORK, Jan 6 (Reuters) - Brazilian sovereign bonds shot higher on Monday as investors returned from their winter holidays, took a fresh look at Brazil's new president, the former hard left union boss Luiz Inacio Lula da Silva, and liked what they saw.

Since winning October's election and being sworn in last week, Lula has increased his appeal on Wall Street by appointing a confidence-inspiring Cabinet and promising not to bust the budget in his quest to help the poor.

"In the short term people are feeling positive about Brazil because, so far, Lula has said and done the right things," said Americo DaCorte, managing partner at Latin World Asset Management in New York.

Benchmark Brazil C bonds <BRAZILC=RR> rose 1-7/8 to bid 70. The bonds have risen more than 20 points from the depths of last summer when fear of Lula was at its highest, based on his notoriety among investors for once advocating default in order to steer money toward the needy.

"In Brazil there are more buyers than sellers even at these higher levels," said one emerging debt trader. Brazil C bonds started last year trading in the high 70s before election-related uncertainty took its toll.

The Lula government has pledged to place pension reform high on the agenda when Congress reconvenes in February; music to Wall Street's ears as Brazil's bloated social security system is one of the greatest drains on its public finances.

"People are putting their money into countries that they think are going to do the right thing," DaCorte said. "And as of today, Jan. 6, people believe that Brazil is going to do the right thing."

Lula, who was once jailed for his opposition to Brazil's 1964-1985 military dictatorship, won this year's campaign after steering his rhetoric toward the political center. Also contributing to his win, Lula refused to participate in the country's notoriously negative campaigning, dubbing himself the candidate of "peace and love."

PEACE AND LOVE IN BRAZIL, NEITHER IN VENEZUELA Venezuela bonds meanwhile traded flat to lower -- with total returns edging down by 0.9 percent -- as a five-week-old national strike ate into the nation's economy and investor confidence.

"The longer the crisis goes on the more you have to believe that the ability as well as the willingness of the government to pay (its bond service) is going to be affected," DaCorte said. "It's a deteriorating situation."

Venezuelan President Hugo Chavez has vowed to punish opposition strikers for crippling the country's oil industry. His opponents, who demand that he resign and hold early elections, have pledged no letup in the conflict, which has plunged the world's No. 5 oil exporter into economic chaos.

Chavez was democratically elected in 1998 vowing 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-styled authoritarian state.

Merrill Lynch on Monday cut its allocation of Venezuelan bonds to underweight from market weight in its model portfolio, suggesting investors increase allocations to Ecuador, an oil producer benefiting from higher world crude prices.

Ecuador bonds got a boost on Friday when the incoming government of Lucio Gutierrez named respected economic consultant Mauricio Pozo as finance minister, a move seen by analysts as opening the door to a much-needed International Monetary Fund deal.

"The announcement of the finance minister last week is still drawing money into Ecuador," one emerging debt trader said.