Panic Over, For Now
Sovereign bond investors are relieved that the leftist admnistration of Luiz Inácio Lula da Silva promises to meet its financial obligations while pursuing its social objectives.
A year ago, Brazilian financial markets were petrified over
the rise of Luiz Inácio Lula da Silva, of the Workers
Party, and his subsequent election as president. The question
was not if, but when he would default on government debts of
$270 billion - voluntarily or not.Alarm over the sustainability
of the government's debt burden has since faded, but a good
dose of uncertainty over his government's commitment to
rational economic policies remains. Although markets rallied
after the election, prices remain depressed. In the final two
months of 2002, between the election and Lula's inauguration on
January 1st, the real recovered by 11%, but still ended the
year down 35%.The C-bond, Brazil's benchmark Brady bond, rose
32% from its historic low in August, but was still worth 16%
less on January 1st, 2003 than a year earlier. The new
government seems serious about pressing ahead with reforms
since the alternatives...
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