Emerging debt-Brazil gains on budget cuts, eased war fears

reuters.com Tue February 11, 2003 11:59 AM ET By Susan Schneider

NEW YORK, Feb 11 (Reuters) - Brazilian sovereign bonds floated higher on Tuesday, buttressing the broader market as Iraq's acquiescence to U.N. demands eased worries over an imminent U.S.-led military strike and Brazil's budget cuts buoyed optimism about the economic giant's fiscal health.

Brazil's portion of J.P. Morgan's Emerging Market Bond Index Plus added 0.92 percent in terms of daily returns as the nation's benchmark C bond BRAZILC=RR notched 0.75 point higher to 70.25 bid. The broader EMBI-Plus yielded a return of 0.29 percent on the day.

Brazil's bonds were bolstered by Monday's government promise to trim its budget by more than 14 billion reais ($3.9 billion) in order to meet an increased 2003 fiscal surplus target, said traders and analysts. The move is likely to underscore rookie President Luiz Inacio Lula da Silva's sincerity to keep the government's books balanced.

The emerging debt market also took its cues from the global arena, where U.S. equity markets drifted upward after Baghdad bowed to U.N. demands to allow overflights by spy planes as part of the search for banned weapons. The concession eased market fears that a U.S.-led strike will come swiftly.

"This has a positive impact on risk-taking, and Brazil -- in Latin America -- is probably the country most dependent on foreigners' willingness to finance its external accounts," said Ricardo Amorim, head of Latin American research at research firm IDEAGlobal.

"When you have an improvement or a deterioration in risk aversion, Brazil is usually the one that suffers most or benefits most," added Amorim.

Uncertainty over a possible war in Iraq has hung over U.S. equity markets and the dollar -- and by extension the emerging debt market -- in recent weeks as investors fret that an attack could unleash further damage to an already tepid U.S. economy.

"There are eased concerns that something is going to happen quickly (in Iraq). It seems like it's been pushed off a little bit, so that's helped out equity markets and that in turn helps us out," said an emerging debt trader.

The emerging debt market appeared to have little reaction to testimony in Congress Tuesday morning by U.S. Federal Reserve Chairman Alan Greenspan, who said that brewing geopolitical issues made it difficult to gauge the health of the U.S. economy.

U.S. stocks trimmed their gains after Greenspan's comments but they remained in positive territory on the day.

Among other emerging economies, Ecuador also notched up gains, with its share of the EMBI-Plus gaining 1.17 percent on the day. Mexico's portion gained 0.14 percent, Colombia's added 0.32 percent and Peru's rose 0.77 percent.

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