WEEKAHEAD-Ecuador bonds seen higher while Venezula falters

www.forbes.com Reuters, 01.19.03, 4:22 PM ET  By Hugh Bronstein

NEW YORK, Jan 19 (Reuters) - Ecuador sovereign bonds, bolstered by a new government austerity plan, are set to rise this week, while Venezuelan debt is sapped by the country's seven-week-old national strike, Wall Street analysts said.

Ecuador bonds are trading at spreads wider than those of Venezuela, reflecting the perception of greater risk. But if Ecuador takes concrete steps toward solvency while Venezuela's economy falls victim to political conflict, analysts said Ecuador could trade inside Venezuela before the end of the month.

Ecuador's new president, Lucio Gutierrez, will freeze wages and raise fuel prices under an austerity decree aimed at closing a financing gap inherited when he took office, the government said on Sunday.

The decree raises the price of the most commonly used gasoline from $1.12 to $1.48 a gallon for consumers, a hike that Gutierrez's leftist and Indian supporters have threatened to protest.

"There are two bets," said Jose Cerritelli, a Bear Stearns debt strategist.

"Either Gutierrez succeeds and he gets an International Monetary Fund agreement within a month, which would prompt an Ecuadorean bond rally, or you think his ex-supporters will go to the streets and force him to backtrack," Cerritelli said. "This would probably be the first step toward default."

Investors will watch this week for protests in Ecuador as well as any signals that might come from the IMF.

"My bet is that the protests will not be serious, the new economic program will survive and that Gutierrez will get a new IMF deal within a month," Cerritelli said. "Therefore the country that will probably rally the most this week and this month will be Ecuador." Daniel Tillotson, an emerging markets analyst at Prudential Securities, was more moderate in his optimism.

"It sounds like (Gutierrez) is delivering some seriousness that will impress the IMF," Tillotson said. "But will the IMF demand legislative endorsement of the decrees, and will the opposition-dominated legislature deliver that endorsement if required? There's still some uncertainty."

Ecuador spreads ended last week at 1541 basis points. Venezuela spreads ended at 1371. Narrower spreads reflect the perception of decreased risk as measured against safe-haven U.S. Treasury bonds.

CHAVEZ, MORE DEFIANT THAN EVER Venezuelan President Hugo Chavez, meanwhile, named a new interior minister and head of the army, placing loyal generals in key posts as he fought to beat a 49-day-old opposition strike that has strangled vital oil exports.

"The damage to the government's finances is continuing," Tillotson said. "Until that turns around, Venezuela bond spreads will have to widen to reflect the increasing risks."

Chavez said on Sunday his government would use "everything we've got" to defeat the strike launched by opposition leaders, who are pressing him to resign and hold early elections.

Chavez was elected in 1998 after 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 only reason Venezuelan bonds might stop their decline would be if investors start to believe that the opposition will force Chavez from office.

"But I think it's too early for that and the people who might be planning to remove him are not going to broadcast their plans ahead of time," Cerritelli said. "So there's really no reason for investors not to reduce their exposure to Venezuela this week."

Venezuela total returns have fallen 8.36 percent so far this month while Ecuador's are 14.19 percent higher, according to JP Morgan's Emerging Markets Bond Index Plus. The index itself stands 1.5 percent higher so far in January.

BRAZILIAN INTEREST RATES Economists largely expect Brazil's Central Bank to hold its benchmark interest rate steady at 25 percent on Wednesday, according to a Reuters poll.

Nineteen of 22 economists surveyed this week bet the bank would leave the Selic rate unchanged when the Monetary Policy Committee (Copom) finishes its monthly meeting on Wednesday, its first under Brazil's new left-leaning president, Luiz Inacio Lula da Silva, and Central Bank President Henrique Meirelles.

"It might be good for the new central banker to establish credibility by raising rates," said Mark Dow, a portfolio manager at MFS Investment in Boston.

"That might drive a stake through the heart of fear that Lula will follow an inflationist policy," Dow said. "But I'm not sure which way the central bank is going to go."