Brazil to sell debt despite global crisis

BRASILIA Sat Oct 1, 2011 3:02am IST

Brazil's Treasury Secretary Arno Augustin talks during an interview with Reuters, in Brasilia, July 8, 2010. REUTERS/Ricardo Moraes/Files

Brazil's Treasury Secretary Arno Augustin talks during an interview with Reuters, in Brasilia, July 8, 2010.

Credit: Reuters/Ricardo Moraes/Files

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BRASILIA (Reuters) - Brazil plans to tap foreign debt markets before year-end despite the global financial turmoil, the country's treasury secretary told Reuters.

The worsening global outlook has caught up with Latin America's largest economy this month, battering Brazil's equity and currency markets. The central bank also revised its 2011 growth projections downward to 3.5 percent this week.

Still, the government expects the debt sale to showcase Brazil's strong fundamentals at a time when many fear the global economy could slip back into recession.

"The fact we're in a crisis reinforces the importance for Brazil to prove its fundamentals," Arno Augustin said in an interview on Friday in Brasilia.

The yield spread, or difference, between 5-year Brazilian global bonds and 5-year U.S. Treasuries fell to 214.8 basis points on Friday from a two-year high of 221.9 basis points on Sept. 23, a sign that Brazilian debt is being considered less risky compared with U.S. debt than it was previously.

IT'S ALL ABOUT THE CURVE

Brazil's objective was not to raise capital or to capture foreign currency, but to broaden Brazil's yield curve, Augustin said.

"The issue has the sole purpose of shaping a good curve for the country so that the companies have a good reference."

A yield curve is a measure of market borrowing costs for Brazilian debt issuers over time.

Brazil's yield curve runs from about 1.53 percent a year in dollars for debt maturing in two years to 5.12 percent a year for 30-year debt, based on the yields of the country's global bonds.

Through 2030, Brazil has at least one large international bond in dollars maturing every year except 2023, 2026 and 2029, allowing investors and companies to set a benchmark for borrowing . As companies and individuals are believed to be higher-risk borrowers than the government, they usually pay the rate expressed by the curve plus a premium.

The government still hasn't decided whether the bonds would be denominated in dollars or reais . The local currency lost over 15 percent so far this month against the greenback.

A weaker real could attract long-term investors who, in addition to the bond yield, see a potential currency gain once global financial markets settle.

The size of the sale would depend on the point on the yield curve the government chooses. The date would depend on market conditions and an effort to avoid coinciding with the announcement of major economic indicators.

BUDGET DISCIPLINE

Augustin also said that Brazil's primary budget surplus -- a key indicator of the government's ability to honor debt payments -- will likely end the year at or above the target.

The government last month increased its primary surplus target by 10 billion reais to 128 billion reais in an effort to reduce inflationary pressure and allow for an easing of monetary policy.

If state and municipal governments fell short of their goal, the central government would make up for the difference, Augustin said.

The soft-spoken trained economist said the government would stand firm in the face of pressure to hike public-sector wages.

Bankers, postal workers and other civil servants have been striking in recent weeks, raising the threat of new inflationary pressure.

The 12-month inflation rate through mid-August reached 7.3 percent -- well above the government's target ceiling of 6.5 percent.

(Additional reporting by Walter Brandimarte in New York and Jeb Blount in Rio de Janeiro; Editing by Diane Craft and Jan Paschal)

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