Brazilian bonds climb on optimism Lula to resist spending rise

Brazil's government bonds gained on optimism President Luiz Inacio Lula da Silva will resist pressure to increase spending in the face of waning approval ratings and a congressional probe into allegations of graft.

The government will seek to limit expenses in 2006 by raising the target for the budget surplus excluding debt payments, Tarso Genro, president of Lula's Workers' Party, said Aug. 12. On the same day, Lula apologized to the nation and said he would ensure the congressional investigation doesn't stunt economic growth.

"It is very positive that the government is trying to propose good policies even amidst the political turmoil," said Boris Segura, who helps manage $800 million in emerging market bonds at Standish Mellon Asset Management in Boston and bought Brazil debt after Lula's national address. "That's very comforting for investors."

The yield on the government's 11 percent bond due 2040 declined to 9.218 percent from 9.248 percent at 11h28 a.m. New York time. The price, which moves inversely to the yield, rose 0.30 cent on the dollar to 118.50 cents, according to JPMorgan Chase & Co.

The yield to the bond's 2015 call date fell to 8.21 percent.

The currency rose 1.4 percent to 2.3410 per dollar from 2.3732 per dollar late Aug. 12. The Bovespa stock index rose for a second day, climbing 0.3 percent today to 27,041.75 after a 1.2 percent gain Aug. 12.

'Unacceptable Practices'

In his address, Lula, 59, said he felt betrayed, by "unacceptable practices of which I never had knowledge." Congress since June has been investigating allegations the Workers' Party bribed lawmakers to help win votes in the legislature, claims that have led to the resignation of three top Workers' Party leaders and Lula's cabinet chief.

"I am conscious of the gravity of this political crisis," Lula said. "I wanted to tell the Brazilian people that I have no shame to say we must apologize."

DataFolha polling company on Aug. 12 said the president's approval rating fell to 31 percent last week from 35 percent in a July 21 poll. The rating is the lowest since Lula took office in January 2003 and down from as high as 45 percent in August last year. Lula hasn't said whether he will run for reelection in next year's presidential race.

"Up to two months ago, he looked like a shoe-in to be reelected, and now that is a big question and it depends on how well he can patch up the present situation,'' Thomas Skidmore, a Latin America scholar and author of six books on Brazil's history, said in an Aug. 12 telephone interview from Providence, Rhode Island.

(Published: Bloomber, August 15, 2005)

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