Emerging Debt-Investors pull back after early January rally

www.forbes.com Reuters, 01.21.03, 1:36 PM ET By Hugh Bronstein

NEW YORK, Jan 21 (Reuters) - Emerging market bond prices edged lower on Tuesday as investors, already nervous about the outlook for the bellwether U.S. economy, cashed in profits earned from Brazil and other Latin American countries since the start of the year.

Traders said the market was not being driven by news. Rather, they said, investors took a breather after bidding Brazilian bonds more than 5 percent higher over the last three weeks.

"You can point to nervousness over the possibility of a war with Iraq, but I think it has more to do with the fact that the market had been up for a while, it stalled and then someone woke up this morning and decided to lessen their position," said Paul Masco, head of emerging market trading at Salomon Smith Barney.

"Selling always begets more selling," he said. "No one wants to be alone out here."

If the United States leads an attack on Iraq, investors fear Latin America could suffer from any short term economic shock waves.

Benchmark Brazil C bonds <BRAZILC=RR> lost 1.0 point to bid 68-3/4. Mexico PAR bonds <MEXPAR=RR> shed 1/8 to bid 98-7/8. Due to Mexico's close trade ties to its northern neighbor, the country is particularly vulnerable to U.S. economic troubles. "As soon as you have any concern or risk looming on the horizon for the U.S. economy, Mexico suffers," said Fernando Losada, senior Latin American economist at ABN-AMRO. "Because there is a lot of uncertainty about a war with Iraq, people in Mexico are nervous."

MARKET DOLDRUMS OVERSHADOW ECUADOR NEWS Despite market predictions that Ecuador would rally on the back of a government austerity plan unveiled over the weekend, the country's total returns slumped 3.26 percent on Tuesday, according to JP Morgan's Emerging Markets Bond Index Plus. "I don't think this necessarily has anything to do with Ecuador specifically," Masco said. "The whole market is lower."

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 some of Gutierrez's leftist and Indian supporters have threatened to protest. Venezuela total returns, already battered by the country's sharp economic downturn and political instability, fell 2.5 percent, adding to losses of 8.36 percent since Jan. 1.

Nobel Peace Prize winner Jimmy Carter said on Tuesday he had proposed an agreement on elections aimed at ending a political impasse between leftist Venezuelan President Hugo Chavez and his foes.

The former U.S. president said after talks with Chavez in Caracas his blueprint included an end to the seven-week-old opposition strike that is crippling the economy of the world's No. 5 oil exporter. Strike leaders have been calling for the populist president to resign and hold early elections.