EMERGING DEBT-Venezuela plunges as strike escalates

www.forbes.com Reuters, 01.09.03, 5:28 PM ET By Susan Schneider

NEW YORK, Jan 9 (Reuters) - Venezuelan sovereign bonds careened nearly 3 percent lower on Thursday after bank workers joined a five-week strike waged by foes of President Hugo Chavez, boosting concerns that the escalating conflict will irreparably damage an already crippled economy.

Venezuela's spreads -- the premium investors demand over U.S. Treasuries to compensate for risk -- widened 0.62 percent to 13.3 percent, their widest point since Feb. 7, 2002, according to the J.P. Morgan Emerging Market Bond Index Plus. The nation's share of the EMBI-Plus plunged 2.85 percent on the day.

Venezuela's debt took a dive after bank workers said they would join the opposition's efforts to force Chavez's resignation or new elections with a 48-hour halt of banking services. The bank stoppage adds to a general walkout that has strangled the oil sector, the source of half the government's revenues.

News of the bank halt helped send the bolivar currency more than 5 percent lower on Thursday, adding to Wednesday's sharp plunge, and chipped steadily away at the value of Venezuela's bonds.

"The longer the strike at (state oil giant) PDVSA lasts, the more pressure it's going to put on the markets," said Ricardo Amorim, head of Latin American research at Wall Street research firm IDEAGlobal. "With the bank strike, the prospect for a solution to resume production at PDVSA looks further away."

Many large supermarkets also began a one-day stoppage on Thursday as part of the strike, which has already caused widespread gasoline shortages.

"They haven't seen any (government) reserve losses yet but they have to be losing money somewhere -- there's just no business going on," said an emerging debt trader. "It's going to be harmful to the economy."

Brazilian debt, meanwhile, shed 0.62 percent in terms of daily returns on the EMBI-Plus as the benchmark C bond <BRAZILC=RR> slipped 0.25 point to 69.25 bid.

Brazilian assets have soared in recent days as investors warm to new President Luiz Inacio Lula da Silva, a former labor union leader who struck fear in hearts of investors because of his one-time leftist rhetoric. With Lula now vowing to pursue reforms and keep spending in check, however, investors have snapped up bonds and pushed the currency higher.

The hefty gains in Brazilian assets prompted investors to take some profits on Thursday, traders and analysts said.

EMERGING ECONOMIES RUSH TO MARKET Mexico's bonds also slipped as the nation prepared to tap international markets with a $2.0 billion, 10-year global note, an increase from the previously planned $1 billion sale. The nation's share of the EMBI-Plus lost 0.3 percent on the day.

Mexico was expected to sell the debt on Thursday in a deal seen yielding around 2.5 percentage points above comparable U.S. Treasuries, said people familiar with the sale. With 10-year U.S Treasuries yielding 4.17 percent, the Mexican bonds would have a yield less than 7 percent.

Emerging economies like Mexico have rushed furiously to international markets this week to take advantage of improved sentiment toward the asset class. After a string of rocky months in 2002, emerging markets rallied in the fourth quarter, bolstered in part by investor cheer for Lula.

Turkey, too, took advantage of the window of opportunity on Thursday, selling $750 million in 10-year bonds. The issue was made at 98.522 percent of face value and a yield of 11.25 percent, according to the lead managers.

The Turkish and Mexican deals follow Chile's sale of $1 billion in 10-year global notes on Wednesday and the Philippines' auction of $500 million, a reopening of an existing bond maturing in 2013.