Emerging market debt eases up on manufacturing numbers; Ecuador doused by tough talk

By Reshmi Basu and Paul A. Harris

New York, Dec. 1 - Emerging market debt dipped on softer than expected U.S. manufacturing data Friday, while Ecuadorian bonds plunged on hard-line debt rhetoric from president-elect Rafael Correa.

In the primary market, VTB24 Capital plc placed a $500 million offering of three-year loan participation notes (A2/BBB+/BBB+) at par to yield Libor plus 82 basis points.

The issuer is a core subsidiary of Moscow-based financial institution Vneshtorgbank.

Citigroup, Deutsche Bank and JP Morgan were joint bookrunners for the Regulation S deal, which was launched under the issuer's euro medium-term note program.

Also, Russian OJSC Bank Petrocommerce set initial price talk for a dollar-denominated offering of three-year senior bullet notes (Ba3/B+) at the 8¾% area.

ING and Merrill Lynch are joint bookrunners for the Regulation S issue of loan participation notes, which will be issued via Petrocommerce Finance SA.

The roadshow is scheduled to end on Dec. 4.

EM softer on manufacturing data

Emerging market debt ended a two-day rally Friday as U.S. equities closed lower on the back of weaker than expected manufacturing data in the United States, which suggested a sharp slowdown in the U.S. economy.

Once again, the growth story in the United States was the driving force behind overall market sentiment, noted sources.

During the session, high-beta credits lost traction.

The Brazilian benchmark bond due 2040 lost 0.25 to 132.60 bid, 132.80 offered. The Argentine discount bond due 2033 gave up 1.40 to 100.25 bid, 101 offered. The Turkish bond due 2030 shed 0.38 to 152 bid, 152.25 offered.

Ecuador slammed

In other news, Ecuador's new leadership spooked investors once again with tough talk regarding its debt.

The country had recovered somewhat this week as short sellers stepped in to cover. On Monday, the country saw its spreads kick out by 68 basis points on news that left-winger Rafael Correa had won the presidential run-off election.

Some investors had expected a more pragmatic approach by Correa once he was in office and were willing to give him the benefit of doubt, which helped lift Ecuador in previous sessions.

Instead the president-elect and his designated minister of finance Ricardo Patino have not eased up on the hard-line rhetoric regarding debt negotiations.

The Andean nation saw a sharp decline Friday following comments made by Patino to the local press in which he said the country would renegotiate its debt.

Both have told the local press that "their intention is to reduce the load of debt, but not through market-based operations, such as calling the 2012s or the 2030s, but by placing ceilings on the amount of resources that can be used to pay the outstanding debt," according to Alberto Bernal, fixed income analyst at Bear Stearns, in a research note.

Correa also said that he would pay off debt to multilaterals at his own pace.

"An interesting issue has to do with the fact that the words of Correa on the treatment of the debt with the multilaterals collide with the words of minister Patimo, who said that the asking of credits to the international financial institutions would be constrained to the 'strictly necessary' level.

"Hence, the only conclusion is that there is still no clarity on what the official policy will be on the debt servicing front," wrote Bernal.

But with the year coming to an end, investors wanted to shed risk and stay short, noted a market source.

Additionally, Ecuador will see more volatility since Correa has no support in congress. The governability issue will keep investors sidelined, added the source.

"The local news there is flowing through the prices," remarked Enrique Alvarez, Latin America debt strategist at think tank IDEAglobal, who added that country's returns are down 6%.

In trading, the country's bond due 2012 plummeted 3.30 to 95.50 bid, 96.50 offered while the bond due 2030 shed 4.25 to 88.50 bid, 89.50 offered.

Mexico up despite dsiputes

Moving to Mexico, conservative Felipe Calderon was inaugurated Friday as the nation's president, but not without some controversy. The ceremony was peppered with protests from leftists as well as a few scuffles, punches and some chair flinging in Congress.

But the headlines did little to depress the country's external debt. Instead Mexico's curve traded against U.S. Treasuries as spreads tightened by three basis points, noted sources.

The real questions were how noisy would the protests be and whether there would be any disruptions. And since the answer was no, Mexico was able to track U.S. Treasuries higher, commented Alvarez.

In trading, the Mexico bond due 2026 added 0.50 to 161.70 bid, 162.50 offered.

Colombia's political scandal

Over to Colombia, this week saw volatile trading on allegations that members of president Alvaro Uribe's party had links to the country's far-right paramilitaries.

The impact from the political crisis has been felt more in the local markets, noted Alvarez.

Nonetheless, questions remain as to how the story will play out, he added. The longer the scandal hangs around, the less likely it will be for Uribe to push through reforms.

On the external side, the country's bonds have had a "timid" reaction to the headlines, but that may change if the story has some legs, observed Alvarez.

An investigative committee will look into whether or not Uribe has militia ties. The president has denied the allegations.

In trading Friday, Colombia's bonds due 2012 eased 0.20 to 117.45 bid, 117.65 offered.

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