U.S. bankers expect a revival of Latin America's leveraged debt markets, thanks in part to the $41.5 billion bailout package for Brazil.
Though spreads on sovereign debt for countries such as Brazil and Argentina remain at double-digit levels, they have narrowed in recent weeks. At the end of Thursday the J.P. Morgan emerging market bond index indicated a spread of 10.7 percentage points, compared with 12 a month earlier.
The tighter spreads have brought with them increased trading. Bankers said hardly any trades were occurring when spreads exceeded 12 percentage points-they topped 16 in early September-but light trading has developed.
"What we needed in Latin America was liquidity," said Robert E. Woods, head of loan syndication for the Americas in Societe Generale's New York office. "And now we're getting it."
A Latin American comeback is significant for many U.S. banks that have targeted the region for imminent growth and as a key driver of future earnings.
U.S. banks betting on the region include BankAmerica Corp., J.P. Morgan & Co., Chase Manhattan Corp., and a number of U.S. investment banks.
But market turmoil has quieted the heavily competitive region since July. Only 46 high-yield bond issues worth $8.74 billion have been underwritten this year through Nov. 19, according to Securities Data Co.
Leveraged lending in the region has also fallen flat. Through Nov. 19 only six leveraged loan packages worth $960 million were syndicated.
Though many bankers see the tightening spreads as positive news, at least one expressed caution. Carroll Perry, director of emerging markets investment banking for BankBoston Corp., said it is far too early to say whether Latin America has come back.
The key, according to Mr. Perry, is Brazil, where President Fernando Enrique Cardoso still needs to push through several tough economic reform packages.
Brazil accounts for 40% of the Latin America's economic output. It was the latest country to be stricken by the global contagion that began in Asia in 1997.
Brazil nearly doubled its key lending rate in September, to halt the flight of foreign investors after Russia devalued its currency in August.
The bailout, organized by the International Monetary Fund, was offered after Mr. Cardoso announced a series of measures Oct. 28 to curb government spending and raise taxes. The United States will contribute $5 billion.
Should the legislative reforms Mr. Cardoso promised fail to materialize, the progress Latin American bond markets have made in the last six weeks would be dashed, Mr. Perry said.
"All it would take is one defeat for Cardoso in Congress," Mr. Perry said. "I think what the market is saying is that Brazil understands its situation."
