Emerging debt-Brazil higher ahead of Congress vote

<a href=reuters.com>Reuters Wed April 2, 2003 12:04 PM ET By Susan Schneider

NEW YORK, April 2 (Reuters) - Brazil's sovereign bonds trotted higher on Wednesday as investors expected Congress to approve a bill paving the way to Central Bank autonomy, a vote widely viewed as a litmus test of the government's ability to push through more radical economic reforms.

Brazil's share of J.P. Morgan's Emerging Market Bond Index Plus, about one-fifth of the total index, added 0.56 percent in early New York trading. The benchmark C bond BRAZILC=RR drooped 0.125 points lower to 81.25 bid.

Brazilian bonds built on their impressive surge of the last three months as optimism continued to run strong for President Luiz Inacio Lula da Silva's plans to overhaul the social security and tax regimes. Lula has said he would send Congress the legislation on the two reforms this month.

In the meantime, Congress was set for an afternoon vote on an amendment changing the financial system's legal framework, a necessary step in the government's effort to give the Central Bank more independence. Investors are watching the vote for signals that Lula has the influence to pull off other politically sensitive reforms, said analysts.

"What people are beginning to focus on is what kind of majority the government will be able to muster," said Suhas Ketkar, senior economist and head of emerging markets analysis at Royal Bank of Scotland.

"This is a constitutional amendment, which requires 308 votes. If they get a significantly larger number of deputies supporting the government, say they get 400 votes, that would be very positive because that would indicate the government has the ability to put together coalitions, and that spells good news for the reforms to follow," said Ketkar.

Since taking office on Jan. 1, Lula's pledges to keep a tight rein on public finances and to pursue reforms have won over investors, who paled at the thought of the former union boss in power just a few months ago. Lula had spooked Wall Street with talk of debt renegotiation in previous campaigns.

The sanguine reform view has helped Brazilian bonds skyrocket nearly 23 percent so far this year. Spreads over comparable U.S. Treasuries, or the premium investors demand to compensate for incurring extra risk, have steadily narrowed to close below 10 percent on Tuesday for the first time since May, 31, 2002.

Traders and analysts said approval of Wednesday's vote was largely priced into bonds, but they noted a failure to pass the measure could provide a negative shock to the market.

"I think everyone is expecting it to pass broadly so we really only have downside from it -- if it doesn't pass it will be bad (for bonds)," said an emerging debt trader.

OIL, RESTRUCTURING PINCH VENEZUELA

Venezuelan debt bucked the rising tide of Brazilian bonds with a 0.20 percent drop on the day. Venezuela's DCB bond VENDCB=RR dove 0.875 points to 70.5 bid.

The slide came amid growing optimism that an end to the U.S.-led war in Iraq may be in sight. With U.S. troops now on the outskirts of the Iraqi capital, Baghdad, investors bet the troops' progress could soon translate into a resolution.

If the war does end sooner rather than later, Middle East oil supplies would not likely see heavy disruptions, which in turn would mean that oil prices could come down. This would be negative for Venezuela, which normally relies on the commodity for about half its government revenues, said analysts.

At the same time, investors are also taking stock of Venezuelan bonds in light of the country's plans to undertake a voluntary restructuring of its debts.

Beyond the prospect for falling oil prices, there is "a realization that the market is going to have to face this voluntary restructuring," said Christian Stracke, head of emerging markets strategy at research firm CreditSights.

"While most people probably agree there won't be any (net present value) negative result, there's still uncertainty surrounding it and as we've seen Uruguay -- a similar situation -- people don't really like to hold it until details of this kind of an exchange are out," said Stracke.