Emerging Debt-Brazil rises, Wall Street likes Lula, so far

Reuters, 01.08.03, 1:58 PM ET

By Hugh Bronstein NEW YORK, Jan 8 (Reuters) - Brazilian sovereign bonds rose on Wednesday as investors gradually increased their bets that the country's new president, former metal worker Luiz Inacio Lula da Silva, will defy early market predictions and properly manage Latin America's biggest economy.

Benchmark Brazil C bonds <BRAZILC=RR> rose 3/4 to bid 71-1/4. The bonds have climbed back from trading in the 40s several months ago, when fear of Lula was at its highest.

Since winning October's election and being sworn in last week, Lula has eased investors nerves by signaling he will not abandon prudent economic policies in his quest to improve the lot of average Brazilians.

"We're seeing a snow ball effect in Brazil in terms of continuing good news out of the authorities," said Rafael de la Fuente, an emerging markets analyst at BNP Paribas.

Lula, a former union boss once notorious on Wall Street for suggesting the government default on foreign bondholders as a way of steering money toward the nation's poor, won points from those same investors on Tuesday when his government vowed to fight a potentially budget-busting court decision in favor of releasing federal government funds to Rio de Janeiro state.

The funds had been blocked due to Rio's failure to pay debts owed to Brasilia.

"The decision yesterday by the administration to stand firm on the application of the fiscal responsibility law is probably one of the best signs we've had from the new government," de la Fuente said.

Brazil's 27 states and 5,000 plus municipalities owe the federal government nearly 300 billion reais ($91 billion), or more than one third of the total public sector debt. If other states win release of funds it could compromise the federal government's debt servicing ability.

Emerging market bond spreads tightened by eight basis points to 705 over U.S. Treasuries, according to JP Morgan's Emerging Markets Bond Index Plus. Brazil's portion of the index tightened 45 basis points to 1223.

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

"The market likes the news coming out of Brazil in spite of the hiccup yesterday with the legal ruling in favor of the State of Rio," said Fernando Losada, senior Latin American economist at ABN-AMRO.

"Lula continues to say the right things and the market also likes most of his economic team," Losada said.

VENEZUELA TRADES SIDEWAYS, UNCERTAINTY REIGNS Venezuelan bonds traded sideways on Wednesday, after having lost more than 5.3 percent in total returns so far this month as the South American oil exporting nation suffers through a general strike launched Dec. 2.

Venezuelan spreads tightened 12 basis points to 1243 on Wednesday. The country's bank workers' unions announced a 48-hour stoppage in support of the strike aimed at pressing leftist President Hugo Chavez to resign and hold early elections.

Union leaders said the action by employees at private and state banks across the country would halt services to the public Thursday and Friday.

Chavez was 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-style authoritarian state.

"I think Venezuela should sell off more than it has," de la Fuente said.

He warned of deep fiscal problems to come as the government is starved of oil and tax revenue.

"Irrespective of what happens politically, you still have an economy in deep recession and an oil company that is at a standstill," de la Fuente said. "It will take some time to get (state oil company) PDVSA running again. You can't just switch the tap on and off."