Emerging bonds slide after Brazil state moratorium
Reuters, Wednesday, January 06, 1999 at 17:13
NEW YORK, Jan 6 (Reuters) - Emerging market bond prices
ended mixed on Wednesday, giving up nearly all the day's gains
late in the session after the Brazilian state of Minas Gerais
declared a 90-day moratorium on debt payments to the central
government.
"Prices dropped a point or two on the news from Minas
Gerais," said a trader. "This may be grandstanding by
(Governor) Itamar Franco, but people don't like it," he said.
"It's a negative development overall for a country that is
going through a crisis," said Paolo Leme, analyst at Goldman
Sachs & Co.
"The debt with the states has been renegotiated at least
three times. Now this would be the fourth time. It is important
that the (Cardoso) government sticks by its program," said
Leme.
Franco is regarded as an independent politician who may be
alone in defiance of the government of President Henrique
Fernando Cardoso. But if other states follwed suit, it would
become difficult for Brazil's Treasury to raise money from the
states, analysts said.
Brazil "EI" bonds <BRAZEI=RR>, up 1/2 point early
Wednesday, dropped 2-1/4 late in the day to bid at 66.
Some traders raised questions as to whether the debt
moratorium would cover outstanding Eurobonds issued by Minas
Gerais. The state has two outstanding Eurobonds, each $100
million. The 7-7/8 bonds mature this Feb. 10, 1999, within the
period covered by the debt moratorium.
There is also a coupon payment due on Feb. 10 on the 8-1/4
bond maturing on the same date in 2000, traders said.
News of the debt moratorium overshadowed earlier
developments in Brazil when the Senate approved a new, higher
version of the CPMF financial transactions tax, a key part of
the government's anti-crisis austerity plan. The measure was
passed in the first full vote in the upper house.
Minas Gerais' debt with the federal government totals
around 18 billion reais ($15 billion).
Franco raised the possibility of a moratorium shortly after
taking office Jan. 1, prompting Cardoso to threaten to use
special powers to recover the debt payments.
"The government is now at the crux of the adjustment
program. Finally, the (fiscal) adjustment is beginning to bite.
But if the government lets go at this point, it will lose" what
it has built through the fiscal program so far, Leme said.
The decline in prices of Brazil bonds affected the rest of
the emerging bond market. Argentina par bonds <ARGPAR=RR> bonds
declined 3/4 of a point to 73-1/4.
Copyright 1999, Reuters News Service
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