Brazilian markets surge on hopes for bank reform

<a href=news.ft.com>Financial Times By Richard Lapper, Latin America Editor, in São Paulo Published: April 3 2003 5:00 | Last Updated: April 3 2003 5:00

Brazilian financial markets surged higher early yesterday amid optimism that the government would win congressional support for plans to give greater autonomy to the central bank.

The legislation - which was to be presented to the legislature late yesterday - is the first of a raft of radical reforms designed to reinforce the government's commitment to fight inflation and increase economic productivity.

Reforms of Brazil's inefficient tax system and costly public sector pension regime will also be presented to congress later this month.

The Real gained 1 per cent in early dealing and was trading at about R$3.27 to the dollar by midday in São Paulo. Stocks rose by nearly 3 per cent and Brazil's international bonds consolidated recent strong advances.

Late on Tuesday the average yield spread over US Treasuries - the most widely used measure of political risk - fell below 1,000 basis points for the first time since May last year. Yesterday saw further falls, with average yields down by about 15 basis points to 9.74 per cent by mid-morning.

The government was expecting to win a big congressional majority in favour of a constitutional change that would pave the way for legislation altering the statutes of the central bank.

The proposal has been controversial both within the governing Workers' party (PT) and among its smaller leftwing allies. But party leaders have apparently persuaded opponents to stick with the government line.

Yesterday Luciana Genro, one of the more outspoken of about 30 deputies on the PT's left wing, said she and her colleagues would vote in favour of the constitutional change. Ninety two of the 513 deputies in the lower house are members of the PT. The bank and other reform proposals are supported by centre-left, centrist and rightwing opposition parties.

Luiz Inácio Lula da Silva, Brazilian president, has opted to bring forward reform proposals because of uncertainty over the war in Iraq. The decision means that an extensive process of consultation with trade unions, business leaders and other groups has been curtailed.

Even so, congressional debates are expected to take many months and analysts do not expect final approval of the laws until next year at the earliest.

Graham Stock, head of sovereign strategy at JP Morgan in New York, said that investors had been encouraged by the way the government had dealt with the left but was not expecting rapid approval of the reforms. "Euphoria [in the markets] is not excessive," he said.