WEEKAHEAD-Emerging debt seen steady despite wild card Venezuela

www.forbes.com Reuters, 01.12.03, 7:23 PM ET By Hugh Bronstein

NEW YORK, Jan 12 (Reuters) - Latin American sovereign bonds were expected to trade flat this week while investors keep an eye on Venezuela, the market's wild card, where a six-week-old national strike has hobbled the world's No. 5 oil exporter.

As they have since the strike began on Dec. 2, investors are left guessing when the work stoppage will end and what fiscal wreckage will be left in its wake. The strikers are calling for fresh elections, hoping to put an end to the controversial presidency of Hugo Chavez.

Some analysts and investors on Sunday said the strike must be reaching a "breaking point," but Jim Barrineau, a vice president in emerging markets research at Alliance Capital Management, warned the market not to hold its breath.

"A negotiated agreement is probably still weeks away because I don't see where either side has room to compromise," he said. Venezuelan total returns have already dropped 7 percent in January while the market as a whole, as judged by JP Morgan's Emerging Markets Bond Index Plus, has risen 1.7 percent.

Barrineau said he expects the nation's bond prices to keep falling in the days to come. Other New York-based analysts were more optimistic.

"I think something is going to break in Venezuela over the next week or so," said Joe Portera, global fixed income director at MacKay Shields, a New York-based investment management company.

The United States on Friday said it supports forming a group of key regional nations who could nudge both sides to an electoral solution to end their bitter impasse. U.S. officials said they hoped to bolster talks brokered by the Organization of American States that have so far failed to reach an accord.

"I'm optimistic about the United States finally getting involved," Portera said. "We actually added a bit to our Venezuela bond holdings over the last week because we think things had gotten overdone in terms of selling."

As long as the situation does not worsen, Portera noted that the government appears to have enough reserves to keep paying its bond service on time.

Chavez, notorious on Wall Street for his failed economic policies and anti-capitalist rhetoric, 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.

The country's constitution allows for a binding recall vote half way through a president's term, which in Chavez's case would be after August. Opposition leaders say that is too far away and they want to go ahead with a nonbinding referendum on Chavez's rule scheduled by electoral authorities for Feb 2.

But Chavez says the February poll would be unconstitutional and and that he will ignore its result, even if he loses. He says he will abide by the outcome of the later referendum.

Venezuelan troops fired tear gas on Sunday to force back tens of thousands of anti-government protesters in Caracas. Chavez threatened take over the country's banks, which last week held a 48-hour stoppage.

But the banks will reopen on Monday, continuing the restricted service hours they have adopted since the strike began on Dec 2. "The Venezuelan strike has played out in a way that has been more damaging than people expected," said David Roberts, senior international economist at Banc of America Securities.

"The pressures are so severe that the situation must be reaching a breaking point," he added.

BRAZIL SEEN STEADY TO HIGHER Investors will also keep an eye this week on Brazil, Latin America's biggest economy, where the new president, Luiz Inacio Lula da Silva, last week mapped out his strategy for reforming the country's public pension system.

"A few details are leaking out," Barrineau said. "It looks like it could be a pretty aggressive plan and that's one factor that could keep a good tone in the market."

Changes to the social security system could soothe worries about Brazil's $260 billion debt load.

Investors fled Brazilian bonds last summer when it started to appear likely that Lula, who had lost the previous three presidential elections, would win October's vote.

The former metal worker was notorious on Wall Street for suggesting years ago that the government default on its debt in order to redirect money toward the nation's poor.

But Brazilian total returns are up 6.88 percent so far this month as Lula's government has delivered market-friendly policy signals, including the pension reform effort.