Brazilian paper up on upgrades by Citigroup, Morgan Stanley; Russia down

By Reshmi Basu

New York, Aug. 27 -Upgrades from Morgan Stanley and Citigroup pushed Brazilian paper higher during Friday's session but overall emerging market debt trading was flat as the August lull continued.

Morgan Stanley upgraded its recommendation on Brazil to overweight from equal weight, while Citigroup raised its ratings to neutral from underweight.

In an emailed report to investors, Morgan Stanley said its view was based on the country's accelerated economic growth, record exports and ongoing reforms.

Morgan Stanley also elevated its recommendation on Venezuelan paper to overweight from equal weight. Mexico was downgraded to equal weight from overweight.

Meanwhile Citigroup cited outside factors as helping Brazil.

"The moderation of growth and inflationary pressures in the United States means that the external environment for Brazil in coming months is likely to be more favorable than we had expected," Citigroup said in its report to clients.

"You are having a bounce back," said Enrique Alvarez, Latin American debt strategist for think tank IDEAglobal.

"Then you had the upgrade by Morgan Stanley and Citibank, and that gives added strength to the overall sentiment focused on Brazil.

"People just like yield. And when Brazil advances, you are going to see the higher beta credits go up," said Alvarez.

And there was more good news coming out of Brazil. The Central Bank reported a public-sector primary surplus of R$6.6 billion for July.

Brazilian paper was up in very thin trading. The C bond added 0.375 to 97¼ bid, tightening 10 basis points to 519 basis points. The bond due 2040 rose three quarters of a point to 105¾ bid at 3:45 p.m. ET.

But one trader said that with so few investors around, trading was barely there. And the upgrade did little to impact other sovereigns.

"It's hard to find anyone out there. It's really, really slow," he said.

The positive move Friday built on gains Thursday after Brazil's Central Bank said it might raise its benchmark lending rate for the first time in more than 18 months in order to curb inflation, according to the minutes releases from last week's policy meeting. Also Thursday Brazil reported that the unemployment rate dropped to 11.2% in July from 11.7% in June.

Elsewhere in Friday's trading Mexico's bond due 2026 was unchanged at 148½ bid and Venezuela's bond due 2027 was nearly unchanged at 93.45 bid, down 0.05.

Russia replacing Paris Club debt

Russian paper continued to fall after Alexei Kudrin, finance minister, said Thursday that the government was willing to replace debt owed to the Paris Club of creditors with international bonds.

The statement comes after Aries Vermogensverwaltungs GmbH sold €3 billion and $2.4 billion of notes backed by Russian Paris Club debt on July 1, depressing Russian paper.

"Russia was irritated when Germany repackaged the debt," said the trader. "I think it raises a supply question for Russia."

The Russian bond due 2030 was down 0.125 to 95¼ bid during Friday's session.

After picking up 1½ points on Thursday, the Aries bond due 2014 fell 1¼ points to 109½ bid, 110 offered Friday from Thursday's close of 110¾ bid.

IMF head visits Argentina

Investors will be playing close attention to the visit to Argentina by the International Monetary Fund's new head Rodrigo Rato on Tuesday.

Argentina shocked the IMF when it declined a $728 million loan payment to refocus on negotiations over its defaulted debt. The government's move essentially removed IMF influence over the debt negotiations.

"I think the consensus is that [president Nestor] Kirchner will have to improve the offer [to bondholders], but the process is taking way too long. And it's not helpful that the IMF is out," said the trader.

"But Brazil is setting a positive tone for LatAm paper."

The Argentina bond due 2008 added 0.40 to 29.40 bid in trading Friday.

Latin America primary seen picking up

After an August lull, the Latin American primary market could heat up in September as issuers aim to hit the market before another increase in interest rates from the Federal Reserve.

"I don't think that it is going to be an overwhelming amount, but I think there is a definite 'yes' that there is going to be some supply out there from Latin America," said IDEAglobal's Alvarez.

"Everyone comes back. You have more liquidity in the market.

"And there are definitely countries out there that need to plug the rest of 2004 or to prefund 2005."

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