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Brazil's Presidential Elections Worry Global Investment Firms - 2002-05-03

International investors are growing wary of Brazil following negative risk assessments issued this week by several banks and brokerage houses. These negative assessments are based on what might happen in Brazil's presidential race later this year, but some analysts say they are premature.

Brokerage houses Merrill Lynch and Morgan Stanley were the first to revise their risk assessments of Brazil warning their clients this week to reduce their investments in Brazilian government bonds. Two major international banks followed suit - Santander of Spain and ABN AMRO of Holland.

What worries these firms is the possibility that the candidate of Brazil's leftist Workers Party may win next October's presidential election. Opinion polls show candidate Luiz Inacio "Lula" da Silva continuing to maintain a strong lead over his rivals, including the candidate of the government's party, Jose Serra.

The latest national poll showed Mr. da Silva ahead with 38 percent, followed by Mr. Serra with just 16 percent. The survey showed the candidate of the Workers' Party had gained almost six points since March, while support for the government party's candidate fell by three points over the same period.

Analyst Alexandre Barros says investors are worried about a possible victory by Mr. da Silva, even though his party, the PT, has become more moderate.

"Lula and the PT, or a good portion of the PT, are now far less radical than they were ten or twenty years ago," he said. "If you look at the origins of the British Labour Party or the American Democratic Party in the last century they were far more revolutionary and then they evolved, matured, and mellowed so to speak. I think the PT is going pretty much in this direction, and Lula is making an effort to sell this kind of image. The trouble is that the investors are not looking at what he says, they're looking at what he did."

Mr. da Silva, who is making his fourth run for the presidency, dismissed the warnings by the investment banks. He told reporters he will concentrate on developing an economic recovery plan, and not worry about risk assessments adding that Brazil remains economically viable.

Members of his party accused the investment banks of trying to influence the election by scaring investors.

The evaluation of these firms has raised Brazil's risk factor on international markets. Its "risk spread", which is the interest rate premium paid on government bonds, is up by three percent and is at its highest since February.

But analyst Barros, who heads a Brazilian risk analysis firm, Early Warning, says these assessments of Brazil are premature and unwarranted.

"The fact is they're just saying 'beware or be prepared because this may happen'. I don't know how many people are saying 'OK I'm leaving Brazil now,'" he said. "Actually I don't believe the traditional multinationals, which have been in Brazil in many cases for 50 or 60 or more years, and have installations here are going to leaveā€¦but the "hot" money people might very well [leave], but I don't think there is any reason for alarm. As a matter of fact there is much more alarm because people are talking about it all the time and because this is making the headlines more than the subject deserves."

Not all investment banks have revised their risk assessments of Brazil. The U.S. bank, J.P. Morgan, Friday issued a positive evaluation of Brazil, saying concerns about opinion polls are exaggerated since campaigning for the presidential election does not officially begin until August.