-->Brazil Has 18 Months to Avert Default, Stracke Says (Update1)
By Charles Penty

Sao Paulo, Jan. 27 (Bloomberg) -- Brazilian President Luiz Inacio Lula da Silva has 18 months to stave off a debt default by winning investor confidence with legislation aimed at cutting government costs, a CreditSights Inc. report said.

If Lula fails to cut costs and make Brazil more attractive for investment, he will doom the country to default as slow growth and escalating pensions spending make it impossible for the government to pay on its $300 billion debt, CreditSights said.

``It's really make-or-break time for Brazil and for Lula,'' said Christian Stracke, head of emerging markets research at the New York-based credit research company. ``He has the chance at least to buy some time.''

Brazil's bonds have surged since Lula was elected on Oct. 27 as the former union leader stressed the need to rein in costs and attempted to make streamlining pension spending a cornerstone of his first year in office. Investors will watch his progress in coming months to see whether Brazil's finances are viable, said Stracke.

Assuming Lula is able to push through legislation aimed at cutting the burden of social security payments this year and other laws in 2004 to lessen the tax burden and make labor regulations more flexible for companies, Brazil may be able to sustain debt payments for ``at least a few years,'' Stracke said.

Lula needs to make ``substantial'' progress within the next 18 months to avoid default by 2005, he said.

`Probably Unsustainable'

``The long-term outlook is still probably unsustainable but maybe Brazil can keep it manageable for another five or six years which is a lifetime for bondholders and for the government,'' Stracke said.

Stracke's analysis follows comments today by George Soros, who said at the World Economic Forum in Davos, Switzerland, that he had a ``very, very favorable'' impression of Lula and called on the global financial system to keep lending to Brazil as long as it follows sound macroeconomic policies.

``Reform of the social security system is very high on his agenda,'' Soros said. ``It was very important that the international financial system should accommodate Brazil. That is to say, if the markets fail to provide capital at acceptable interest rates, then I think the authorities have to step in and act as lenders of last resort.''

Even so, ``external shocks,'' such as war in Iraq for instance, that pushed oil prices up to $50 a barrel for a prolonged period -- could push Brazil into default, perhaps even before July, Stracke said. Brazil must pay down or roll over about 90 billion reais ($24.9 billion) in maturing Treasury debt in the second quarter.

``If the world does really look like falling apart, Brazil is going to be one of the credits that is most vulnerable,'' he said.

Brazil's benchmark 8 percent bond maturing in 2014 rose 0.25 cent to 66.75, paring the yield to 17.76 percent, according to J.P. Morgan Chase & Co. Yields have fallen from about 22.5 percent on the day after Lula was elected in October.


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