Emerging debt-Brazil sinks on pension reform doubts

www.forbes.com Reuters, 01.15.03, 12:38 PM ET By Susan Schneider

NEW YORK, Jan 15 (Reuters) - Brazil's sovereign bonds tripped nearly 1.5 percent lower on Wednesday, weighing on the broader market, as investors worried the courts may be dilute new President Luiz Inacio Lula da Silva's plans to overhaul the costly pension system.

Brazil's share of the J.P. Morgan Emerging Market Bond Index Plus lost 1.4 percent, dragged by a 1.5 point drop in the benchmark C bond <BRAZILC=RR> to 69.75 bid. The broader EMBI-Plus slid 0.42 percent.

The Brazilian losses came after Marco Aurelio Mello, the president of Brazil's supreme court, told a local newspaper that Lula's pension form proposal "is unlikely to prosper in a democratic state under the rule of law."

The comments, which also sank the nation's currency, the real, and Brazilian stocks, raised doubts about how much leverage Lula's two-week-old presidency may have to push through structural reforms investors view as paramount to improve the nation's finances, said analysts.

"They are talking about giving some concessions to the military and other special cases amongst the civil servants, so I guess there is some disappointment about how aggressive that reform bill is going to be," said Siobhan Manning, Latin American debt strategist at Italian investment bank Caboto.

Venezuela's debt also moved into negative territory as foes of President Hugo Chavez maintained a six-week-old strike that has choked oil production -- the source of one-half the government's revenues -- to a trickle. The nation's share of the EMBI-Plus lost 0.87 percent.

While investors are holding onto some Venezuelan debt in hopes Chavez will step down, opening the door to a more market-friendly leader, the reigning fear is that the two sides will remain at an impasse and further damage an economy already in recession. Venezuela's debt has lost nearly 9 percent so far this month on the economic worries.

"The bolivar (currency) is down about 6 percent, the strike continues and there were a bunch of downgrades in the past few days," which are combining to weigh on the bonds, said an emerging debt trader.

Moody's Investors Service cut the ratings on four Venezuelan oil projects on Tuesday and Fitch Ratings lowered the ratings of Venezuela and state oil company PDVSA, among others, last week.

Members of Venezuela's opposition were in New York on Wednesday to call for greater international support in the conflict, which they said must be resolved by democratic and electoral means.

Chavez, meanwhile, branded the strikers "terrorists" on Tuesday and said he would not negotiate with them.

Ecuador's debt also took a dive, weighed down by market heavyweight Brazil, in the hours before retired Col. Lucio Gutierrez took office as the Andean nation's president. The nation's share of the EMBI-Plus slid 2.13 percent on the day.

Gutierrez, who helped lead a coup three years ago that toppled the president, won over voters with vows to rein in corruption and poverty. He has also wooed investors with pledges to pay the debt and seek an International Monetary Fund deal, although investors say the IMF accord must come quickly if the country is to avert a cash crunch.

(Reporting by Susan Schneider, Reuters Messaging: susan.schneider.reuters.com@reuters.net, tel: +1 646 223 6319.)