Emerging debt-Iraq war nerves keep market horizontal

reuters.com Thu February 20, 2003 11:55 AM ET By Susan Schneider

NEW YORK, Feb 20 (Reuters) - Emerging sovereign bonds meandered sideways on Thursday as investors, captive to global war worries, stayed on the sidelines awaiting fresh developments in the U.S.-led march toward a possible strike on Iraq.

J.P. Morgan's Emerging Market Bond Index Plus posted a scant 0.24 percent return on the day as market heavyweight Brazil gained 0.18 percent. Brazil's benchmark C bond BRAZILC=RR slipped 0.25 point to 69.875 bid.

With the United States facing fierce opposition in the United Nations Security Council in its push for a war in Iraq, emerging markets investors were making few moves pending new clues on the timeline and international support for an attack, analysts and traders said.

Investors "are just waiting to see what's going to happen on the global backdrop, what the conditions are going to be for war and diplomacy," said Siobhan Manning, Latin American debt strategist at Italian investment bank Caboto.

"You don't want to take any risks. You don't want to take any huge positions. You just want to batten down the hatches and wait and see what happens with the war," she added.

The United States and Britain said on Wednesday they would introduce a resolution within a week seeking U.N. authorization for a war against Iraq, which U.S. President George W. Bush sees as justified because he says the nation is producing banned weapons.

While the broader market tread water, a handful of sovereign debt issuers made modest moves on Thursday.

Venezuela's debt slid after the state security police captured a business chief who helped lead a general strike against President Hugo Chavez. A judge ordered the leader, Carlos Fernandez, and union boss Carlos Ortega detained for rebellion.

"It's pretty quiet. The only real price movement has been Venezuela," said an emerging debt trader. "People are taking (the judge's arrest orders) as a little bit negative, that Chavez may be gaining some ground."

Fernandez and Ortega spearheaded a two-month opposition strike, started in December, in a bid to force Chavez to call early elections or resign. Chavez has taken a tough stance against his foes since the leaders called off the strike in early February to ease the burden on the private sector.

"It's more proof that Chavez has the upper hand, the opposition is weaker, and it really raises the risk of when or if he will step aside," said Manning. "It's an event like this that caps the upside for Venezuela."

Wall Street would love to see a more market friendly leader replace the former paratrooper Chavez, who has introduced currency curbs and price controls in a bid to bolster an economy battered by recession and the strike's strangling of the nation's lucrative oil production.

Venezuela's DCB bond VENDCB=RR slid 0.25 point to 69.625 and the nation's share of the EMBI-Plus lost 0.08 percent.

URUGUAY GAINS, ECUADOR EXTENDS RALLY

Uruguay remained an emerging markets focus in the midst of lingering uncertainty about whether the nation will undertake some kind of debt restructuring.

Uruguay, ravaged by the fallout of Argentina's financial crisis and a run on its own banks, failed to pass an IMF review in December on its $2.8 billion loan program. The IMF said this week it expects a deal on Uruguay's 2003 economic program within coming days. Last week IMF sources said talks included a possible restructuring of the nation's debt.

On Wednesday, U.S. Treasury Undersecretary for International Affairs, John Taylor, weighed in on the issue, saying Uruguay may need help to close its financing gap and this may include "some action" on the country's debt. But Taylor said the gulf might be narrowed through fiscal adjustment or with additional aid.

The nation's 2012 dollar bonds URUGLB12=RR , which have lost half their value over the past year, moved slightly higher in early trading with a gain of 0.75 point to 43.0 bid.

Ecuador, meanwhile, extended its strong showing of recent days on optimism over a $200 million loan deal with the International Monetary Fund. The nation's share of the EMBI-Plus rose 1.32 percent on the day, adding to the 20.1 percent the debt has already added so far this year.

Ecuador's new President Lucio Gutierrez has taken tough austerity measures to help close a 2003 financing gap estimated at $2 billion. The efforts helped pave the way for a long-elusive IMF deal that analysts have said is necessary to help Ecuador avoid a cash crunch.

The fund's executive board is slated to vote on the Ecuador accord next month.