FIXED INCOME RESEARCH

JUNE 8, 2001

THE

Sovereign
Strategist
Latin America
Asia
Europe/M.E./Africa

212-526-7036
212-526-6310
44 (0) 207-260-1767

HIGHLIGHTS
Moodys new sovereign ceiling policy will have broad-

ranging implications for the ratings of many international

corporates and quasi-sovereigns. We would not be surprised
to see the affected issuers trading through their relevant
sovereign benchmarks. Separately, we change our
recommendations in Venezuela, Bulgaria, and Ecuador.
Argentinas debt swap successfully defers amortization and

interest payments over the next few years, thus obtaining

substantial cash-flow relief. This liquidity
relief gives Argentina time to restore economic growth
through fiscal consolidation and competitiveness-enhancing
policies. After reviewing Argentinas revised financing needs
for 2001-2002, we conclude that the government should be
able to avoid default during this period.
Peruvian President-elect Toledos victory was cheered by

financial markets after months of political uncertainty.

Nevertheless, the coming months will prove challenging
for the new government, and we do not expect a speedy
recovery from the current economic travails.

Contents
Market Strategy
Lets Play
the Ratings Game ....................... 3
Recommended
Sovereign Weightings ............... 8
Recommended Assets ............. 12

Economics
Argentinas
Megaswap:
A Post Mortem .......................... 13
Peru:
Here Comes the Sun? ............... 17

Emerging Markets Index

Performance & Analytics ......... 19
Indicators and
Economic Forecasts ................. 21
Sovereign Credit Ratings ......... 24
Sovereign Calendar .................. 25
Index of Recent Articles .......... 27

Sovereign Comparative Statistics

Sovereign Spreads over U.S. Credit Index

EM Best and Worst Performers, Absolute Excess Return, YTD

May 31, 2001

May 31, 2001

bp
Nigeria

1,400
EM-Credit
HY-Credit
ICBI-Credit

1,200

2,474

Russia

1,968

Philippines

1,000

1,132

Colombia

800

972

Indonesia

-109

600

Brazil

-307

Peru

-317

400
200

Argentina

-538

0
1/94

1/95

1/96

1/97

1/98

1/99

1/00

1/01

-1,000 -500

Information Ratio, June 7, 2001

0 bp 500

1,000 1,500 2,000 2,500 3,000

EM Best and Worst Performers,

Contrib. to Index Excess Return, YTD, May 31, 2001
Russia

239.0

2
EM
HY
Credit

Mexico

61.7

Venezuela

36.8

Nigeria

32.4

Indonesia

-0.1

Peru

-3.7

Brazil

-53.0

Argentina -129.8
-1
1-Mo

3-Mo

6-Mo

-180

YTD

-90

0 bp

90

Total Returns for Select Asset Classes, June 7, 2001

Annualized Total Return Volatility, June 7, 2001

%
9

%
12

EM
HY
Credit

180

270

EM
10

HY
Credit

8
6

4
2

0
MTD

3-Mo

6-Mo

YTD

1-Mo

3-Mo

6-Mo

See Analytical Notes on page 26 for detailed descriptions of charts.

Lehman Brothers

June 8, 2001

MARKET STRATEGY
Lets Play the Ratings Game

A big change in
rating agency policy pushed
spreads tighter.

Moodys has announced that it is changing its long-standing sovereign

ceiling policy.

The announcement marks a significant departure from traditional rating

agency approaches and will have broad-ranging implications for the
ratings of sovereign-ceiling-constrained international corporates and
quasi-sovereigns.

We expect to see a number of emerging market corporates and quasisovereigns trading through their relevant sovereign benchmarks. Sovereigns might also benefit as a second-order market effect.

Separately, we are taking a more cautious stance in Venezuela and

Bulgaria, moving our well-timed overweights to neutral. We are also
upgrading Ecuador to neutral after an ill-timed underweight.

As much as sovereign investors like to malign the major rating agencies, the fact
is that the agencies can at times meaningfully influence market spreads. Moodys
announcement that it is reviewing the policy by which it has constrained corporate
foreign currency credit ratings to the foreign currency rating of the country of
domicile (the so-called sovereign ceiling) is a case in point. The notion that at least
38 issuers may soon be rated higher than the country in which they are based caused
the spreads of these issuers to rally significantly. It appears to us that there is room
for the spreads of affected issuers to tighten further.

THE MOODYS POLICY EXPLAINED

Recent history drives the
policy move.

The idea behind Moodys announcement is that recent experiences in Russia,

Ukraine, Indonesia, Ecuador, and Pakistan suggest that sovereign defaults are not
necessarily accompanied by blanket moratoria that prevent non-sovereign issuers
from paying their foreign currency bonds. These experiences directly contradict
the reasoning by which rating agencies have historically constrained non-sovereign ratings to that of the sovereign. That reasoning held that in a sovereign default
scenario, countries would ration scarce foreign exchange resources to the detriment of otherwise creditworthy non-sovereign issuers. Consequently, in light of
recent developments, a more flexible sovereign ceiling policy is appropriate in
Moodys view.

Certain issuers foreign

currency ratings will lie
between the sovereigns foreign
currency rating and the issuers
own local currency rating.

Under this new more flexible policy, Moodys will assess first the likelihood with
which a particular sovereign will impose a broad debt moratorium in the event of
a sovereign default. If there is a near-zero risk of a broad moratorium, then, in
Moodys line of thought, it follows that the foreign currency rating of a nonsovereign issuer should not be constrained at all by the sovereign ceiling. Indeed,

June 8, 2001

Lehman Brothers

MARKET STRATEGY

in this case, the foreign currency rating of the issuer should converge to its standalone credit quality, as reflected by its local currency rating.
In countries in which Moodys is less than fully convinced that no broad
moratorium will be imposed, it will look at specific issuers within a country to
assess the likelihood that they, individually, will be spared from any foreign
exchange restrictions. The characteristics that Moodys will evaluate to assess the
likelihood of exemption from foreign exchange restrictions include:

The degree of access to foreign exchange through export activity,

The degree of foreign ownership or access to other forms of external support,

The degree of integration into global production and supply networks,

The degree of importance to the national economy and in international capital

markets, and

The extent of holdings of foreign assets.

The bottom line of the policy change is that Moodys will now rate a broad group
of international issuers somewhere between the issuers local currency rating and
the foreign currency rating of the country of domicile. As Figure 1 shows, this
rating band can be quite wide for some issuers.

THE S&P APPROACH

S&P has focused on
the degree of dollarization
in an economy.

S&Ps approach to the sovereign ceiling is based on whether or not an economy

is highly dollarized. In highly dollarized economies, such as Argentina, Panama,
and Uruguay, Standard and Poors has concluded that the authorities are less
likely to interfere with private sector foreign exchange transactions than they were
in the past, even in a scenario involving sovereign default. Consequently, many
corporate issuers in highly dollarized economies managed to pierce the sovereign
ceiling. While the rating policy resulted in significant spread tightening for
affected issuers at the time the policy change was announced (1997), many
analysts found the reasoning a bit opaque.
In non-dollarized economies, S&P has allowed occasional breaches of the sovereign ceiling for specific (non-securitized) issuers. There, S&P has argued one of
two things: 1) that specific corporates are insulated from developments in their
domestic market because of extensive international operations (as is the case for
Panamco and Cemex in Mexico); or 2) that some issuers are strategically so
important to their international corporate parent that they can count on external
support in the event of difficulty (as is the case for Coca-Cola FEMSA). In any
event, the number of exceptions that S&P has made to the sovereign ceiling rule
has been very small in non-dollarized economies.

MARKET IMPACT
Corporate and
quasi-sovereign spreads
could tighten further.

Lehman Brothers

Because Moodys announcement on June 7 reflected a substantive change in the

way rating agencies analyze the impact of sovereign risk on corporate issuers, it
immediately drove spreads of the affected issuers tighterin some cases by a lot.
YPF, for example, rallied 30 basis points on the news. It is entirely conceivable that

June 8, 2001

Figure 1.

Issuers Under Review for Upgrade by Moodys

Argentina
Telefonica de Argentina S.A.
YPF S.A.

Sovereign Issuer
Foreign
Local
Currency Currency
Rating
Rating
B2
B2
B2
B2
A3

Brazil
Banco ABN Amro Real S.A.
Banco AGF Braseg S.A.
Banco Barclays e Galicia S.A.
Banco Bilbao Vizcaya Brasil S.A.
Banco Bradesco S.A.
Banco Citibank S.A.
Banco de Investimentos CSFB Garantia
Banco do Brasil S.A.
Banco Itau S.A.
Banco Sudameris Brasil, S.A.
BankBoston Banco Multiplo S.A.
Lloyds Bank Plc (Brasil)
Unibanco-Uniao de Banc. Bras
Banco Safra S.A.
Banco Votorantim S.A.
Petroleo Brasileiro S.A. - Petrobras

B1
B1
B1
B1
B1
B1
B1
B1
B1
B1
B1
B1
B1
B1
B1
B1
B1

Chile
Banco Santiago
Banco del Estado de Chile
Banco Sud Americano

Baa1
Baa1
Baa1
Baa1

A1

Estonia
AS Hansapank

Baa1
Baa1

A1

Hong Kong
Hongkong and Shanghai Bank Corp.

A3
A3

Aa3

India
ICICI Ltd.

B1

Baa1

Sovereign Issuer
Foreign
Local
Currency Currency
Rating
Rating
Ba2
Ba2
Ba2

Latvia
Latvijas Unibanka

Baa2
Baa2

N/A

Lebanon
Banque Audi
Byblos Bank
BLOM Bank

B1
B1
B1
B1

B1

Malaysia
Petroliam Nasional Berhad

Baa2
Baa2

A3

Mexico
Banco Nacional de Mexico, S.A. (BANAMEX)
Banco Santander Mexicano, S.A.
BBVA - Bancomer, S.A.
Coca-Cola FEMSA, S.A. de C.V.
Petroleos Mexicanos
Telefonos de Mexico, S.A.

Baa3
Baa3
Baa3
Baa3
Baa3
Baa3
Baa3

Baa1

A2

South Africa
Telkom SA Ltd.

Baa3
Baa3

A2

Turkey
Turkiye Vakiflar Bankasi TAO

B1
B1

B3

Venezuela
Bariven S.A. (guaranteed by PDVSA)

B2
B2

B3

Moodys has not published local currency ratings for all issuers

some corporate issuers that have traditionally traded wider than their relevant
sovereign benchmark may find themselves trading well inside. This may also be
the case for certain quasi-sovereigns that have ample access to foreign exchange,
are well integrated into global supply and demand chains, and are of critical
importance to the national economy. Petronas, Pemex, and Petrobras are good
examples of such issuers.
There is a second order effect as well. If Moodys announcement means that a
broader range of emerging market entities will have easier and cheaper access to
international markets, it follows that this should have positive macroeconomic
effects. The sovereign marketplace was quick to catch on to this, and sovereign
spreads in places such as Mexico, Argentina, and Brazil also tightened on the news.
Indeed, the news helped to consolidate the growing perception that the emerging
market asset class is finally facing a brief respite from the massive volatility of the
past few months.

June 8, 2001

Lehman Brothers

MARKET STRATEGY

VENEZUELA, BULGARIA, AND ECUADOR

Time to make
some portfolio changes.

In view of the generalized improvement in the emerging markets environment and

in light of certain country-specific developments, we are making a number of
recommended portfolio changes.

In Venezuela, where we have maintained a well-timed overweight for

dedicated emerging markets investors since January 26, we are reducing
our allocation to neutral. For the most part, performance during the past
few months was driven by investors perception of Venezuela as a
defensive credit, given its strong balance sheet and despite the rhetoric
emanating from policymakers. While Venezuelas balance sheet remains
strong, we are becoming a little more preoccupied with the tone of recent
political discourse. Talk of further emergency powers for President Chavez
and the continuing evidence of capital flight are giving us some pause. To
be sure, Mr. Chavezs rhetoric has always been problematic. But recently
his statements have become much more reflective of his interventionist
tendencies; there is a growing risk that he will actually try to implement
less-than-market-friendly measures. In addition, and as Figure 2 shows,
there has been a steady drain in international reserves this year. With the
general tone in Latin America now having improved somewhat and with
Venezuela trading expensively to Brazil, it seems time to take a less
aggressive stance in the credit.

In Bulgaria, we recommend that investors use the recent rally to trim their
positions and move to a neutral weighting. Spreads had been wide because of
election concerns, but tightened as uncertainty about the likely electoral winner
and his economic policy (and team) receded. We now expect the market to take
a breather as focus turns to post-election dynamics and negotiations between the
main parties. Although asset prices remain lower than in September 2000
(before the market began focusing on the elections), we think near-term upside
is limited, given the post-election uncertainty.

Figure 2.

Venezuela International Reserves, US$ billion

18

16

14

12
11/3/2000

Lehman Brothers

12/15/2000

1/26/2001

3/9/2001

4/20/2001

6/1/2001

June 8, 2001

In Ecuador, we have taken some bad knocks. We suggested a rather ill-timed

underweight on April 20, when it looked like the countrys IMF program was
in serious jeopardy. Since that time, the VAT reform was implemented (although court challenges remain unresolved), the IMF has begun disbursing
funds, and the critical OCP pipeline continues to proceed inexorably toward the
building phase. Being underweight the credit in this environment, given the
large carry it provides and our expectation of a relatively calm broader market
environment, doesnt make sense any more. We return to a neutral position.
Marco Santamaria 212-526-7036

June 8, 2001

Lehman Brothers

Recommended Sovereign Weightings

Ratings
LATIN AMERICA

Recommendation
Dedicated
EMG
ICBI

Date of
Weighting

Rationale

Argentina

B2**/B**

Neutral

na

28-Mar-01

As we suspected, the recent swap is creating a strong

technical bid for Argentine bonds. We believe this bid
will remain in place for some time to come. Although
country fundamentals are still questionable, we will
wait a bit longer to reassess our weighting.

Brazil

B1/BB-

Overweight

na

10-Sep-00

Despite the uncertainties in Argentina and the recent

uptick in inflation, the basic investment-led, low-inflation growth story remains intact. With Brazil now trading at the widest levels in two years versus the rest of
Latin America, it is time to re-establish a full overweight.

Chile

Baa1/A-

na

Neutral

12-Jan-01

Domestic demand should recover later this year, assisted by lower interest rates. The sovereign looks
fairly valued; high-grade investors with exposures to
corporates should consider swapping to CAF or Mexico.

Colombia

Ba2/BB**

Neutral

Neutral

05-Jan-01

Economic activity appears relatively buoyant, but

progress in congress on (already watered-down) key
reforms is slowing. Valuations are no longer as attractive, given the recent rally, but we still like the carry for
now.

Costa Rica

Ba1*/BB*

Neutral

Outperform

05-Jan-01

Despite the recent economic slump, decent fundamentals and reasonable pricing make this a good play
for crossover investors.

08-Jun-01

With the VAT reform now implemented, the IMF disbursing funds, and the OCP pipeline moving toward
the construction phase, a neutral position seems warranted.

Ecuador

Caa2/CCC+** Neutral
na
(From
Underweight)

Mexico

Baa3/BB+* Overweight

Outperform

02-Mar-01

Mexico continues to attract interest from both crossover and dedicated investorsnot to mention foreign
direct investors. Moodys change to its sovereign ceiling policy could have further positive market impact on
Mexican quasi-sovereign and corporate issuers and
help drive sovereign spreads tighter.

Panama

Ba1/BB+

Neutral

Outperform

02-Mar-01

While still a relative safe haven, Panama is exhibiting

some fiscal slippage. Panama is now less attractive
relative to Mexico for dedicated EM investors.

Peru

Ba3**/BB-

Underweight

na

05-Jan-01

Mr. Toledo faces the difficult task of reactivating the

economy while maintaining fiscal discipline. Given the
strong rally in the aftermath of the election, risks
outweigh rewards.

Trinidad
& Tobago

Baa3/BBB-

na

Outperform

13-Oct-00

We continue to recommend T&T as one of our favorite

higher-quality sovereign credits based on its strong
economic performance and bright prospects. The
recent discovery of an additional 1 trillion cubic feet
(tcf) of natural gas is a credit positive.

Uruguay

Baa3/BBB- Underweight

Underperform

16-Mar-01

A difficult external environment has led to worsening

macro performance over the past few years. Valuations appear unattractive at current levels.

Venezuela

B2/B

na

08-Jun-01

Recent rhetoric by President Chavez has been particularly disturbing. While the political environment bears
watching, Venezuelas ability to service debt is high.
Take advantage of the wide spreads and the high carry
for now, but dont overstay your welcome!

Neutral
(From
Overweight)

ICBI = International Crossover Bond Index NA

* Under review for possible upgrade/outlook positive.
** Under review for possible downgrade/outlook negative.
na= not applicable to this investment benchmark

Lehman Brothers

June 8, 2001

Recommended Sovereign Weightings,

continued

Ratings

Recommendation
Dedicated
EMG
ICBI

Date of
Weighting

China

A3/BBB

na

Neutral

01-Dec-00

A sovereign with net external debt worth less than 10%

of GDP and with extensive multilateral credit support is
a statistically sound credit, despite the socialist political system and rickety banking system as underlying
concerns. The strong performance of Chinas recent
ten-year deal has reinforced this credits allure.

Hong Kong

A3/A+

na

Neutral

31-May-00

Hong Kong has no public external debt securities, a

sound fiscal position, and a stabilizing currency board
system with a solid track record. An upgrade from S&P
and a positive outlook from Moodys in mid-February,
plus strong retail interest in recent new issues, have
helped the performance of Hong Kong credits.

India

Ba2*/BB

Overweight

Neutral

28-Apr-00

We maintain an overweight position in India and view

it as a stable credit, offering diversification value.
Further, given the extremely limited number of Indian
external debt issues, we expect it to benefit from
scarcity value.

Indonesia

B3/B-

Underweight

na

29-Mar-01

Any shreds of opportunity in Indonesian assets seem

to have evaporated recently. This has been a specialist-only market since the Asian crisis, and has provided
significant upside in limited cases. With the recent
closure of a large gas facility in Aceh province due to
local unrest and strained relations between the government and the multilaterals, the prospects of sovereign financial difficulties are rising. Indonesia has
become a sovereign risk to be avoided.

Korea

Baa2/BBB

Neutral

Neutral

18-May-01

Our expectation of underperformance relative to the

International Crossover Bond Index has been a significant miscue. We think Korean spreads are well ahead
of fundamentals, but clearly the bias is toward improvement rather than underperformance in the near term.

Malaysia

Baa2/BBB

Underweight

Outperform

05-Jan-01

The momentary lapse of faith in Malaysias exchange

rate peg also created an opportunity for investors to
boost their exposure to this credit. We continue to favor
Malaysia and its quasi-sovereign issuers.

Philippines

Ba1/BB+

Neutral

Underperform

26-Oct-00

We have been overcautious on our Philippine recommendation, although fundamentals (and particularly
the fiscal situation) remain challenging. The new administration has made great strides toward rectifying
some of the major problems, which could result in
further outperformance if prudent policies are followed. First, however, Pres. Arroyos loyalists need to
score a victory in the recently held (but still unconfirmed) congressional mid-term elections..

Thailand

Baa3/BBB- Underweight

Underperform

31-May-00

The new governments policy platform suggest that

fiscal accommodation will be a centerpiece of economic policymaking. Apart from this fiscal challenge,
last years indictment of the prime minister for failure to
properly disclose personal assets could undermine
foreign investor confidence in the new government due
to the risk that the PM will be forced to resign if the
decision is upheld by Thailands Constitutional Court.

Rationale

ASIA

ICBI = International Crossover Bond Index

* Under review for possible upgrade/outlook positive.
na= not applicable to this investment benchmark

June 8, 2001

Lehman Brothers

Recommended Sovereign Weightings

Ratings

Recommendation
Dedicated
EMG
ICBI

Date of
Weighting

Rationale

EUROPE
Bulgaria

B2/B+*

Croatia

Baa3**/BBB-**

Neutral
(From
Overweight)

na

8-Jun-01

We recommend that investors use the recent rally in

Bulgarian assets (spreads have tightened by about 70 bp
in the past two weeks) to trim their positions and move
to a market weight position. Spreads had been wide
because of election concerns for about six months, but
tightened as uncertainty about the electoral winner
and the economic policy (and team) receded. We now
expect the market to trade sideways (or off slightly) as
focus turns to post-election dynamics and negotiations
between the main parties. Although the asset prices
are still lower than in September 2000 (before the
market began focusing on the elections), we think
near-term upside is limited, given the post-election
uncertainty.

Neutral

Neutral

01-Dec-00

Croatias credit fundamentals continue to improve,

albeit gradually. Authorities persist in promising reforms, although the pace thus far remains slow. The
relatively tight spreads offer poor risk/reward relative
to other emerging European peers.
Relatively tight spreads offer poor risk/reward.

Czech Rep.

Baa1/A-

na

Underperform

30-Aug-00

Greece

A2/A

na

Neutral

09-Feb-00

Spreads remain relatively rich to other EMU credits.

Hungary

A3/A-

na

Outperform

05-Jan-01

Continues to be the strongest candidate for EU accession. We recommend Hungary as a credit that offers
defensive value against a potential sharp slowdown in
the U.S.

Poland

Baa1/BBB+ na

Neutral

11-May-01

Credit outlook is on an improving trajectory. Nevertheless, Hungarys credit fundamentals remain strong
relative to Poland and warrant tighter spread differentials between the two credits.

Russia

B2/B-

Overweight

na

09-Mar-01

Although we continue to see Russia as a strong

performer in 2001, given the strong rally in the Russian
external debt assets in recent weeks, we recommend
trimming the overweight position slightly. Possessing
twin surpluses, Russias payment capacity remains
strong, at least over the next 12 months. Russias
economic fundamentals will likely remain strong as
long as the hydrocarbon sector remains robust. Finally, we expect the reform process to pick up in Russia
in the coming monthsa factor that is not completely
priced in.

Slovak Rep.

Ba1*/BB+*

Underweight

Outperform

05-Jan-01

We recommend Slovakia for crossover investors as a

country leading its peer group in the EU-accession
process.

Slovenia

A2/A

na

Neutral

03-Feb-00

Slovenia is a solid credit with strong economic fundamentals and a low level of indebtedness. Current
spread levels offer limited near-term upside.

ICBI = International Crossover Bond Index

* Under review for possible upgrade/outlook positive.
** Under review for possible downgrade/outlook negative.
na= not applicable to this investment benchmark

Lehman Brothers

10

June 8, 2001

Recommended Sovereign Weightings,

continued

Ratings

Recommendation
Dedicated
EMG
ICBI

Date of
Weighting

Israel

A2/A-

na

Neutral

16-Feb-01

Strong demand for Israel Electric Corp.s ten-year

issue in May illustrated the positive market outlook for
the Israeli sovereign. The domestic security situation
remains challenging, and the growth outlook will be
less robust in 2001, but credit quality remains stable
and so should the sovereign ratings. We think a neutral
weighting in Israel is prudent in the face of an increasingly constructive political environment.

Qatar

Baa2/BBB+* na

Neutral

11-May-01

We continue to see improvements in economic fundamentals on the back ofstrength in the natural gas sector. However,at current spread levels, the good news
is priced in.

Turkey

B1**/B-

Neutral

na

09-Apr-01

Despite some near-term relief on the back of favorable

inflows and a debt swap, Turkeys debt dynamics
continue to be on a negative trajectory. In particular,
we remain concerned about the programs ability to
deliver, given the extremely fragile banking system
and troublesome political environment.

Morocco

Ba1/BB

Neutral

na

05-May-00

Credit outlook closely linked to agriculture. With

better-than-normal rainfall over the past few months,
agricultural production and, hence, growth are poised
to increase.

Nigeria

NR/NR

Underweight

na

05-May-00

Given the heightened likelihood of Nigerian assets

being included in a Paris Club-led debt restructuring,
we think the risk/reward warrants staying on the sidelines.

South Africa

Baa3*/BBB- Underweight

Underperform

12-Jan-01

South Africa remains rich on a relative basis. The

authorities plan to issue Eurobonds to reduce the
forward book; although this is a positive development
for the credit, it could hurt South African Eurobond
spreads.

Rationale

MIDDLE EAST

AFRICA

ICBI = International Crossover Bond Index

* Under review for possible upgrade/outlook positive.
** Under review for possible downgrade/outlook negative.
na= not applicable to this investment benchmark

June 8, 2001

11

Lehman Brothers

Recommended Assets

Country

Position

Asset

Current Level

Comments

LATIN AMERICA
Argentina
(Neutral)

Buy
Sell

08 12 and 18
Short and Long Ends

Brazil
(Overweight)

Buy
Sell

24
27

Buy
Sell

C
DCB

Buy
Sell

09
11

3 bp

Shorter bond, pick spread, pick yield, pick current yield.

Dollar differential in Mexico is not worth much.

Buy
Sell

08
06

64 bp

Steep credit curve (spread), even steeper yield curve.

Pick current yield, too.

Buy
Sell

20
PDI

Buy
Sell

IRB
PDI

Buy
Sell

29p06
11

Give only 40 bp, receive free extension option.

Trinidad
& Tobago
(Overweight)

Favor

T & T 20

Given our positive view of the credit and the strengths of

T&T relative to both Mexico and Qatar, we believe the
T&T 20 will trade well inside both the UMS 16 and the
Qatar 30.

Venezuela
(Neutral)

Buy
Sell

Par
DCB

350 bp

Pick up a lot of stripped spread for 2-year extension with

a lot of default protection. Exit target around 200 bp.

Buy
Sell

30
10

120 bp

The whole Russian Eurobond curve has rallied in significantly over the past week and has continued to steepen.
The spread differential between Russia 10s and Russia
30s is currently at its all-time widest of 120bps. We expect the curve to flatten ether under bullish or bearish
scenarios. We therefore recommend holders of Russia
10s to switch into the Russia 30s (the only Russian Eurobond to trade wide to Brazil) or to go long the spread
between Russia 10s or Russia 30s.

Mexico
(Overweight)

Panama
(Neutral)

Highest yielding assets across the curve.

Pick 9 bp
in yield

Pick yield, take out 8.75 points, stay on same part of the
curve.
Prefer fixed-coupon bonds over floaters.

Extend 0.2 year in duration, pick 50 bp in yield.

23 bp sprd
-27 bp yld

IRBs are 5 years shorter in average life and fixed coupon.

EUROPE
Russia
(Overweight)

Costas Hamakiotes, Ph.D. 212-526-8082

Robert MeAdie, Ph.D. 44-207-260-3036

Note: Outright recommendations of the form Favor imply relative value offered by an asset in the context of our sovereign weighting call.

Lehman Brothers

12

June 8, 2001

ECONOMICS
Argentinas Megaswap: A Post Mortem
The debt exchange implemented last week was successful and should help to kickstart the economy and restore the outlook. Because, in our opinion, Argentina is
not inherently insolvent, but rather the victim of a confidence trap, restoring
confidence is the only way to improve creditworthiness and promote real growth.

Thanks to the swap, fears of default in 2001 and 2002 will soon dissipate.

The government won precious time to fight economic depression through

fiscal consolidation and competitiveness-enhancing policies.

Although the government paid handsomely for the exchange, if output does
recover and the fear of default vanishes, as we expect, the end will have justified
the means.

SWAP RESULTS ARE GOOD . . .

On June 1, Argentinas highly anticipated debt exchange took place. The summary
of the results is as follows:

The government issued $30.4 billion of new bonds and took away
$28.1 billion of existing ones.

The average life of the new bond portfolio is 2.8 years longer than the old
debt, while the average yield is 35 bp higher.

The NPV gain for the government was $103 million before fees and
-$50 million after.

Cash flow relief from deferred interest and amortization payments will
reach $16 billion in 2001-2005 and $7.8 billion in 2001-2002.

In short, all the goals sought by the government with the swap were achieved. The
headline figure exceeded expectations by $10 billion (50%). Cash relief was in line
with official projections. And despite the extended duration, the yields of the new
bonds (14.4%-16.0%) were practically the same as those of the retired debt.
Before the swap, the yield curve was inverted, reflecting the fact that fears
of default were actually short term. This allowed the government practically
to extend duration without increasing yields. After the swap, the yield curve
has flattened.

. . . DESPITE DOOMSAYERS CRITIQUES

Yet, despite this success, many voices have risen to criticize the transaction on the
grounds that it mortgages the future and prolongs the agony without really solving
the underlying problem (which, in the minds of doomsayers, is Argentinas
inability to pay back its large stock of debt).

June 8, 2001

13

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ECONOMICS

Indeed, as shown in Figure 1, cash-flow relief stemming from the swap is followed
by an increase in the debt service burden, particularly in 2007-2008.
However, looking at this graph and concluding that the megaswap is nothing but
smoke and mirrors would be analytically and fundamentally wrong. First, the
only legitimate way to value the stream of cash flows represented in the figure is
by calculating its NPV. And as mentioned earlier, this value is negative, indicating
a net reduction in net service payments due to the swap.
Second, Argentinas national government is not insolvent. If it were, the authorities could as well throw in the towel and default. But why should they? The fiscal
responsibility law mandates a reduction in the fiscal deficit from $6.5 billion in
2001 (2.3% of GDP) to zero in 2005. This is not a posture but the law. And just as
the convertibility law does not allow the president to devalue, the fiscal responsibility law does not allow him to run a fiscal deficit higher than the one established
in that norm for each year.
To ensure compliance with the fiscal responsibility law, this year, the government
has enacted fiscal reforms worth $3.7 billion, including the introduction of a tax
on financial transactions. In the future, the necessary fiscal savings will be
generated by state reform and by changes in tax administration and the tax code.
Of course, no sustained improvement in public finances is possible without
growth, and the fact that the latter has been absent during the past three years is
what influences doomsayers expectations. But far from a reason to trash the
megaswap, economic stagnation reinforces the case for it. Such a transaction
reduces rollover risk, improves credit access, and diminishes lending costsall
crucial to growth.
A second rationale for the megaswap is that it allows the government to hedge
against the fiscal cost of social security reform. To be sure, the privatization of
the public pension system, which took place in 1994, is challenging government
fundraisers. This is because $4.5 billion of worker contributions is shifted every

Figure 1.

Net Effect of Swap on Debt Service, US$ billion

20
15
10
5
0
-5
-10
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031

Lehman Brothers

14

June 8, 2001

year from the government to the coffers of the private pension administrators.
The good news is that in a few years time, this situation will reverse, as the
significance of public pensions in the national budget (currently 36%) will start
to fall.1
For this reason, pushing debt service forward in time through a megaswap such
as the one implemented by Argentina on June 1 is not a futile exercise but a sound
financial strategy. The objective is not just to buy time (and certainly not to
postpone the inevitable) but, actually, to increase the likelihood of debt repayment. In fact, now that a megaswap has been executed successfully, it is only
natural to expect there will be more in the future.

VOLUNTARY MEANS FAIR VALUE

One of the reasons Argentina succeeded in attracting $33 billion worth of bond
offers into the swap ($8 billion from foreign investors alone) was that the
government was willing to pay to make it fair. On the bonds it took back, it offered
a premium (this was highest in the case of Pars and Discounts, to induce foreign
participation and release collateral in 2001). On the new bonds it placed, it offered
market yields and higher-than-expected coupons. And to the dealer banks, it gave
150 million in fees (55 bp per dollar worth of new bonds).
Such generosity raised some eyebrows, especially among the skeptics who had
bet against Argentina in the weeks preceding the swap. But how can investors be
attracted to a deal that involves extending debt duration if the issuer gives nothing
in return? In the end, by creating strong market incentives to participate, the
government did the right thing. Had the terms of the swap been different, the
transaction would have been smaller and the government would have not achieved
its main objective, i.e., reducing debt service in the next few years.

NOW WHAT?
Having lost fluid access to voluntary financing in the last quarter of 2000,
Argentina managed to avoid default thanks to multilateral and special (mostly
non-market) local financing. Borrowing requirements after the swap are

The government is also planning to implement a second-generation reform of the pension system to
reinforce its medium-term finances.

Figure 2.

CF Deficit
Amortization
Loans
Bonds
Other
Total

June 8, 2001

Gross Financial Needs, US$ billion

2001
6.0
11.0
3.5
7.5
1.0
18.0

15

2002
3.2
16.8
8.6
8.2
1.0
21.0

2003
2.0
16.3
7.1
9.2
1.0
19.3

2004
0.9
18.3
6.5
11.8
1.0
20.2

2005
-1.3
18.3
6.2
12.1
1.0
18.0

Lehman Brothers

ECONOMICS

$6.1 billion in 2H01 and $21 billion in 2002. However, international organizations are scheduled to disburse $5.8 billion this year and $7 billion next year.
In addition, in 2002 the government will be able to:

Defer repayment of blindaje loans to the Fund for one year (this would save
$2.4 billion at the expense of 2004).

Roll over a $2 billion bond issued this year, which banks hold against
liquidity requirements.

Assuming fiscal targets are met in 2H01 and 2002, the government has to raise only
$10 billion from voluntary sources between now and December 2002 (in addition
to the rollover of Letes, which represents another $5 billion). This is not an
impossible task, considering that pension funds can absorb $3 billion and the
rollover of amortization and interest payments in the local market can easily take
care of the rest.
Finally, while the financing challenges in 2003 and beyond are significant, they
can be ameliorated through a combination of multilateral refinancing (new IMF
programs followed by other multilaterals to roll over existing debt) and liability
management (i.e., more megaswaps after 2002). In the final analysis, what matters
from the point of view of Argentinas creditworthiness today is not what Argentina
has to pay three years from now (this cannot be determined accurately anyway),
but its ability to grow and preserve fiscal discipline.

CONCLUSION
The main objective of the megaswap was to push amortization and interest
payments forward in time and, in particular, away from 2001 and 2002, to obtain
liquidity relief and, hopefully, reduce sovereign spreads by averting near-term
default risk. In this sense, the government was successful. Moreover, judging from
the remaining financing needs for this year and next, we conclude that the
government can easily avoid default during this period. This is necessary for the
public sector to recover creditworthiness, which, in turn, is essential for the
economy to grow.
Joaquin Cottani 212-526-1979
jcottani@lehman.com

Figure 3.

Voluntary Market Needs, US$ billion

2001

Total Needs
- Prefinancing
- Multilateral Loans
- Special Transactions
- Deferred IMF Payment
- Voluntary Market
Financing Gap

Lehman Brothers

16

Done
18.0
2.1
3.9
4.3
0.0
1.6
6.1

Pending
6.1
0.0
5.8
0.0
0.0
4.3
-4.0

2002
21.0
4.0
7.0
2.0
2.4
5.6
0.0

June 8, 2001

ECONOMICS
Peru: Here Comes the Sun?
After a volatile election and months of malaise, a break in the clouds. Mr. Toledos
victory marks a turning point for democracy and perhaps for the economy, as
reflected in the bounce in both the bond and the equity markets. Yet those who expect
a speedy recovery may be disappointed. With apprehension so deeply entrenched on
the demand side, the new president is unlikely to engineer a large enough confidence
shock in the short run. Recovery will be slow and not without further pain.

YEARS SINCE ITS BEEN CLEAR

Years of political instability and corruption, disturbances in the global market, and
environmental stress have left Perus economy mired in the doldrums. GDP rose
a paltry 1.4% in 1999 and seemingly recovered to a 3.6% clip in 2000. Yet last year,
the improvement was felt disproportionately in the primary sector, which rose near
6%, and it was largely statistical. And although demand managed to grow almost
3%, it did so despite a near 5% contraction in gross fixed investment, led by a more
than 15% decline in public investment.
Results in 1Q, regrettably, are not encouraging. Real output slipped 2.6%: private
investment was down 7% and public investment plunged over 30%. Public consumption also declined 7% in 1Q, while private consumption edged higher by only
1.6%. There are no indications that 2Q will be any different. Quite the contrary.
Investment in Peru is sunlight to a garden. With it, abundant growth is possible;
without it, the earth is barren. For example, during the formerly termed glory
years from 1993-1997, when the economy expanded at an average of 7% pa, gross
investment was expanding near 16% pa. The private component surged roughly
18%. Perhaps more than anything else, the shape of the recovery curve will hinge
on the new administrations success in attracting capital, from home and abroad.
It will not occur overnight.

THE ICE IS SLOWLY MELTING

To quicken the turnaround in sentiment, the Toledo camp will have its work cut
out, for the shock must be major to pull the economy out of depression. The choice
of cabinet and team will be the first important signal the new government will send.
Investors need evidence that some degree of economic orthodoxy can be expected.
Specifically, the fate of the finance ministry and the role, if any, of the marketfriendly Mr Kuzynski in the administration should be announced quickly. Second,
signals that the independence of autonomous institutions (i.e., central bank, Sunat)
will continue, particularly given the public contempt for years of corruption, are
essential. Third, the new government must articulate a transparent and comprehensive economic policy that reconciles vote-catching campaign promises with eyewatering fiscal realities. In addition, efforts to forge consensus or coalition in

June 8, 2001

17

Lehman Brothers

ECONOMICS

congress must be immediate to dispel the lasting fear that the current lack of
majority in the legislature will prevent the Toledo administration from passing
sorely needed structural reform.
Considerable time will be required to provide these assurances, restore lost
confidence, and unlock seemingly frozen investment and consumption in the local
market. Convincing foreign investors to risk capital in Peru may take even longer.

ITS ALL RIGHT

Given the long road ahead, the outlook is reasonable, at best. Mr. Toledos
challenge is daunting, and the constraints are heavy. Adhering to an IMF program,
essential for market sentiment, provides little fiscal room for maneuver. The
cyclical downturn in foreign markets, still undefined, does not help, while prices
for raw material exports hover near historical lows.
The next presidents popularity is incomplete, because he won by only a slim
margin against the one candidate who nearly took the country to ruin a decade
earlier and defaulted with external creditors. A relatively large sector of the voting
public still harbors a strong dislike for Mr. Toledo, while many of those who voted
for him will be expecting paybacks. Moreover, far from being erased from the
political landscape, the APRA party, and Mr. Garcia himself, will be a force to be
reckoned with, despite Mr. Garcias magnanimous gestures following the election.
Given the alternative, Mr. Toledos victory was indeed a welcome event; it
reduced the risk of an even deeper economic decline or ensuing political chaos.
With the right mix of leadership, signalling, and co-operation, there is at last some
hopea commodity in short supply for many months.
Gianfranco Bertozzi 212-526-3339
gbertozz@lehman.com

Lehman Brothers

18

June 8, 2001

Emerging Markets Index: Performance, June 7, 2001

REGIONAL COMPARISON
Total Returns (%)

Distribution by Market Weight

30
25
20
15

EMG
AMERICAS
EUROPE
MID EAST
AFRICA
ASIA

AMERICAS
72%

10
5

AFRICA
4%

0
MTD

3-M

6-M

MID EAST
ASIA
5%
4%

YTD

-5

EUROPE
15%

TOTAL RETURNS: AMERICAS

Month-to-Date (%)

Year-to-Date (%)

6.5

Peru
6.0

Ecuador

2.4

AMERICAS
1.5

Venezuela

Costa Rica

9.1

Uruguay

9.0

Mexico

5.8
5.5

Colombia

0.9

Peru

Panama

0.9

AMERICAS

0.6

Costa Rica

June 8, 2001

3.7
1.2

Brazil

0.2

Uruguay

7.2

EMG

1.2

Mexico

9.4

Venezuela

2.5

EMG

11.4

Panama

2.6

Brazil

13.5

Colombia

3.8

Argentina

16.9

Ecuador

-0.2

Argentina
1

-5

19

10

15

20

Lehman Brothers

Emerging Markets Index: Performance, June 7, 2001

TOTAL RETURNS: EUROPE, MID-EAST, AFRICA

Month-to-Date (%)

Year-to-Date (%)

5.1

Russia
4.6

EUROPE

29.5

Nigeria

29.4
25.7

EUROPE

2.5

EMG

Russia

14.3

Bulgaria

2.2

AFRICA

Turkey

2.2

Bulgaria

8.3

Morocco

8.2
8.1

1.4

MID EAST
Lebanon

0.2

S. Africa

Slovak Rep.

0.2

Slovak Rep.

Croatia

0.1

EMG

Morocco

0.1

Croatia

5.4

Nigeria

0.1

Turkey

5.0

AFRICA

0.1

MID EAST

-1

7.2

4.0
3.5

Lebanon

-0.1

S. Africa

7.6

10

15

20

25

30

TOTAL RETURNS: ASIA

Month-to-Date (%)

Year-to-Date (%)

EMG

2.5

Philippines

Philippines

0.7

15.1

Kazakhstan

10.2

Kazakhstan

0.7

Thailand

7.4

ASIA

0.7

EMG

7.2

Thailand

0.4

Indonesia

ASIA

0.2
0.0

6.1

Indonesia
0.5

Lehman Brothers

1.0

1.5

2.0

2.5

3.0

1.7
0

20

10

15

20

June 8, 2001

Equity Market Indicators, June 7, 2001

U.S.

Americas
Index

5,250

Nasdaq
S&P rescaled
EMG Index (R)

4,625

Index
1,400

900

EMG Index (R)

850

4,000

800

3,375

750

2,750

700

2,125

650
600

1,500
1/00

2/00

4/00

6/00

8/00

10/00 12/00

2/01

4/01

900

Americas

1,300

840

1,200

780

1,100

720

1,000

660

600

900

6/01

1/00

E. Europe

2/00

4/00

6/00

8/00

10/00 12/00

2/01

4/01

Asia
Index

95

Index
260

900

E.Europe
EMG Index (R)

830

75

760

65

690

55

620

45
4/00

6/00

8/00

10/00

12/00

2/01

4/01

860

220

800

200

740

180

680

160

620

140

560
500

120

550
2/00

920

Asia
EMG Index (R)

240

85

1/00

6/01

1/00

6/01

2/00

4/00

6/00

8/00

10/00 12/00

2/01

4/01

6/01

Regional Equity Industry Source: Morgan Stanley Capital International Emerging Markets Index Series.

Currencies
Brazil Real

Polish Zloty
Index

Index

900

5.00

850

4.75

850

2.17

800

4.50

800

2.04

750

4.25

750

1.91

700

4.00

700

1.78

650

3.75

650

600

3.50

2.43

Bzl Real
EMG Index (R)

2.30

1.65
1/00

2/00

June 8, 2001

4/00

6/00

8/00

10/00 12/00

2/01

4/01

1/00

6/01

21

900

Pol Zloty
EMG Index (R)

600
2/00

4/00

6/00

8/00

10/00 12/00

2/01

4/01

6/01

Lehman Brothers

Credit Market Indicators

High Yield Mutual Fund Flows:

Downgrade/Upgrade Ratio

March 4, 1992 - June 7, 2001

1,500,000

June 6, 2001: $230.2 million

YTD: $5.8 billion

High Yield Fund Flows

Moodys

8 Week Moving Average

1,000,000

S&P

Average
500,000

-500,000

1
0

-1,000,000
3/92

3/93

3/94

3/95

2/96

2/97

2/98

2/99

2/00

2/01

3/93

Moody's Trailing 12-Month,

Dollar-Based Default Rate (Spec. Grade)

9/94

3/96

9/97

3/99

9/00

Sovereign Credit Quality Indicators

Index

14%

10.3

12%
10.0
10%
9.7

8%
6%

9.4

4%
9.1

2%
0%
3/90

8.8
3/92

3/94

3/96

3/98

3/00

1/97

Credit Market Indicators

June 7, 2001
Est. Spread
(bp)
Credit Index
Telecom
Energy
Media
Electrics
Banks
Finance Companies
Reits
Sov, Sup & Canadians
Non U.S. Corporates
Emerging Yankees
AA+
A
BBB
X-overs
Cap Securities Index

Lehman Brothers

Current
Index OAS
145
175
147
177
184
117
118
210
100
169
288
85
136
205
335
195

MTD

-45
-48
-16
-57
-49
-45
-41
-11
-30
-41
-64

-2
-5
-7
-7
-4

-27
-49
-61
-139
-119

1/99

1/00

Moodys
Baa2
13
Baa3
12
Ba1
11
Ba2
10
Ba3
9
B1
8
B2
7
B3
6

YTD

-4
-5
-2
-7
-5
-3
-4
-2
-5
-8
-6

1/98

1/01

S&P
BBB
13
BBB12
BB+
11
BB
10
BB9
B+
8
B
7
B6

Note: Country ratings weighted

by outstanding marketable
debt (external)

22

June 8, 2001

Economic Indicators
Real GDP
(% Change y-o-y)
AMERICAS
Argentina
Brazil
Chile
Colombia
Ecuador
Mexico
Panama
Peru
Venezuela
EMEA
Bulgaria
Croatia*
Czech Republic
Hungary
Israel
Poland
South Africa
Russia
Turkey**
ASIA
China
Hong Kong
India
Indonesia
Malaysia
Philippines
Korea
Thailand

Inflation
(% Change y-o-y)

Current Account Bal

(% of GDP)

Exchange Rate
(End Period)

2000

2001

2002

2000

2001

2002

2000

2001

2002

2000

2001

2002

-0.5
4.5
5.4
3.0
2.5
7.2
2.7
3.5
3.2

1.0
3.6
3.5
3.0
4.0
2.4
3.0
1.0
4.0

3.0
4.2
5.0
4.0
4.0
4.4
3.5
4.0
2.5

-0.8
6.0
4.5
8.7
91.0
9.0
1.4
3.7
13.4

-0.5
5.5
3.5
8.3
28.9
6.7
3.0
2.5
12.2

1.0
3.5
4.0
8.5
20.0
5.5
1.8
4.0
30.0

-3.5
-4.1
-1.3
-0.2
8.5
-3.1
-9.2
-3.0
12.0

-4.9
-4.5
-1.5
-2.0
-2.0
-3.5
-8.0
-3.2
7.0

-3.7
-3.5
-3.0
-3.0
-4.0
-2.8
-7.0
-3.8
3.0

4.5
2.9
3.1
5.2
4.8
4.1
3.1
7.7
7.2

5.0
3.0
3.5
5.2
4.0
3.5
3.4
4.0
-7.5

4.0
3.0
3.8
5.0
n/a
4.5
3.8
3.5
4.0

10.1
4.7
3.9
9.8
0.9
10.2
5.3
20.2
40.0

6.0
4.5
4.6
9.0
2.5
6.3
6.4
16.0
65.0

5.0
4.0
4.8
7.5
n/a
6.3
6.6
9.0
35.0

-4.8
-5.0
-4.8
-3.3
-1.0
-6.3
-0.3
18.5
-5.0

-4.0
-4.5
-6.5
-4.5
-0.9
-5.5
-0.2
12.7
2.5

-3.5
-4.0
-7.0
-4.0
n/a
-5.5
-0.9
9.3
-2.0

1.82
7.3
37.6
281.1
4.20
4.14
7.59
28.2
685

8.0
10.5
6.0
4.8
8.5
4.0
8.8
4.3

7.5
4.0
5.8
3.8
3.9
2.5
4.5
3.3

8.0
5.5
7.0
4.5
6.7
4.0
7.0
5.0

0.3
-3.7
5.3
3.8
1.6
4.3
2.3
1.5

1.0
0.2
6.0
10.0
2.2
5.5
4.0
1.8

1.0
3.0
6.0
6.0
3.0
4.5
3.5
2.7

1.9
4.8
-1.2
4.0
13.0
9.0
2.4
8.5

1.2
3.8
-1.5
3.0
6.0
4.5
1.8
4.0

0.2
5.1
-1.3
2.5
3.5
1.0
0.2
2.0

8.28
8.31
8.00
7.80
7.80
7.80
46.6
50.0
50.0
9625 11000 14000
3.8
3.8
3.8
49.9
53.0
52.0
1263 1300 1225
43.4
47.0
45.0

1.00
1.00
1.00
1.96
2.17
2.21
574
620
645
2,236 2,570 2,776
25,000 25,000 25,000
9.6
9.8
10.3
1.0
1.0
1.0
3.53
3.75
3.94
700
735
845

1.80
8.0
38.6
283.2
4.30
4.06
7.90
30.0
1350

1.80
8.5
36.0
237.0
n/a
4.30
7.90
31.0
1600

* Croatia exchange rate is period average.

** Turkey calculations based on GNP.

June 8, 2001

23

Lehman Brothers

Sovereign Credit Ratings, June 7, 2001

Rating
Moodys
Argentina
Australia
Austria
Bahamas
Bahrain
Barbados
Belgium
Belize
Bermuda
Bolivia
Brazil
Bulgaria
Canada
Cayman Islands
Chile
China
Colombia
Cook Islands
Costa Rica
Croatia
Cuba
Cyprus
Czech Republic
Denmark
Dominican Republic
Ecuador
Egypt
El Salvador
Estonia
Fiji
Finland
France
Germany
Gibraltar
Greece
Guatemala
Honduras
Hong Kong
Hungary
Iceland
India
Indonesia
Iran
Ireland
Israel
Italy
Jamaica
Japan
Jordan
Kazakhstan
Korea
Kuwait
Latvia

B2**
Aa2
Aaa
A3
Ba1
Baa2
Aa1
Ba2
Aa1
B1
B1
B2
Aa1
Aa3
Baa1
A3**
Ba2

Ba1*
Baa3**
Caa1
A2**
Baa1
Aaa
B1
Caa2
Ba1
Baa3
Baa1
Ba2
Aaa
Aaa
Aaa
Aaa
A2
Ba2
B2
A3*
A3
Aa3
Ba2*
B3
B2
Aaa
A2
Aa3
Ba3
Aa1
Ba3
B1*
Baa2
Baa1
Baa2

Rating
Moodys

S&P
B**
AA+
AAA

AAA+
BB
AA
B+
BBB+*
AA+

ABBB
BB**
B
BB*
BBB-**

A
AAAA
B+
CCC+**
BBB-**
BB+
BBB+*

AA+*
AAA
AAA

A+
AA+*
BB
CCC+**

AA+*
AAA
B+
AA+
BB-*
BB
BBB*
A
BBB

Lebanon
Liechtenstein
Lithuania
Luxembourg
Macau
Malaysia
Malta
Mauritius
Mexico
Moldova
Monaco
Mongolia
Morocco
Netherlands
New Zealand
Nicaragua
Norway
Oman
Pakistan
Panama
Papua New Guinea
Paraguay
Peru
Philippines
Poland
Portugal
Qatar
Romania
Russia
Saudi Arabia
Singapore
Slovakia
Slovenia
South Africa
Spain
Suriname
Sweden
Switzerland
Taiwan
Thailand
Trinidad & Tobago
Tunisia
Turkey
Turkmenistan
Ukraine
UAE
United Kingdom
USA
Uruguay
Venezuela
Vietnam**

B1**
Aaa
Ba1
Aaa
Baa1
Baa2
A3
Baa2
Baa3
B3
Aaa

Ba1
Aaa
Aa2
B2
Aaa
Baa2
Caa1**
Ba1
B1
B2
Ba3**
Ba1**
Baa1
Aa2
Baa2
B3
B2
Baa3
Aa1
Ba1*
A2
Baa3*
Aa2

Aa1
Aaa
Aa3
Baa3
Baa3
Baa3
B1**
B2
Caa1**
A2
Aaa
Aaa
Baa3
B2
B1

S&P
B+
AAA
BBBAAA

BBB
A

BB+*

B
BB
AAA
AA+

AAA
BBB
BBB+
B+
B**
BBBB+**
BBB+*
AA
BBB+*
B-*
B
AAA
BB+*
A
BBBAA+
B-**
AA+*
AAA
AA+**
BBBBBBBBB
B-**

AAA
AAA
BBBB

* Under review for possible upgrade/outlook positive.

** Under review for possible downgrade/outlook negative.
Not rated

Lehman Brothers

24

June 8, 2001

Sovereign Calendar
LATIN AMERICA
Mon 11
Chile: Market and Public Holiday, Corpus Christi Day
Mexico: INEGI industrial activity, % y-o-y

Period Prev 3

Tues 12

May

Brazil: IBGE IPCA inflation index, %

Brazil: FIPE first-week inflation, %
Chile: Central Bank monetary meeting to set target rates
Mexico: Banxico weekly auction results (28-day)
Mexico: Banxico weekly foreign-reserve levels, US$mn

Thurs 14

Brazil, T&T: Market and Public Holiday, Corpus Christi Day

Fri 15

Argentina: INDEC prelim. industrial production, %y-o-y

ASIA, EUROPE, MIDDLE EAST, AND AFRICA

Mon 11
China: Industrial production (tentative), % y-o-y
Tues 12

Wed 13

Apr

Prev 2

Prev 1 LBGE Market

1.9

-3.7

-1.90

-0.5

0.8

0.46
0.22
4.00
10.21
38.37

0.38
0.50
3.75
10.76
38.37

0.58
0.59
3.75
10.39
38.90

0.42

0.40

3.75

3.80

May

-4.2

-5.6

0.2

1.0

May

19.0

12.1

11.5

11.3

11.4
12.4
10.5

Czech Rep.: Industrial output, % y-o-y

Hungary: CPI % yoy
Philippines, Russia: Market and Public Holiday, Indep. Day
South Africa: Mining production, % y-o-y, nsa
South Africa: Manufacturing production, %y-o-y, nsa

Apr
May

13.8
10.4

6.5
10.5

9.8
10.3

10.2
10.3

Apr
Apr

1.4
6.6

-3.8
2.4

-1.7
1.8

-1.3
11.8

China: Trade balance (tentative), US$bn

Czech Rep.: PPI, % y-o-y

May
Apr

1.0
4.2

2.4
4.7

0.9
4.1

2.0
4.0

May
May
May
Apr
May
May
Jun
Jun

0.0
8.6
1.6
11.2
6.6
14.6
12.00

0.8
9.5
1.5
10.1
6.2
14.9
12.00

1.6
9.7
1.6
11.4
6.6
14.0
12.00

2.0
10.0
1.7
13.0
6.8
13.5
12.00

12.00

Jan-May -12.0

-15.1

-18.4

-20.0

-20.1

Thurs 14

Poland: Market and Public Holiday, Corpus Christi

Fri 15

China: Consumer prices (tentative), % y-o-y

China: Retail sales (tentative), % y-o-y
Malaysia: Consumer prices, % y-o-y
Philippines: Unemployment rate, %
Poland: CPI, % y-o-y
Poland: M2, % y-o-y
South Africa: MPC meeting, repo rate, %
South Africa: BER inflation expectations survey

Sometime during Week

Poland: State budget, Zl bn

4.0

6.6

Further Ahead
June 17
Bulgaria: Parliamentary elections

June 8, 2001

25

Lehman Brothers

Analytical Notes
Sovereign Comparative Statistics (Page 2)
1)

2)

3)
4)

5)

6)

Sovereign Spreads over U.S. Credit IndexThe spread differentials (1994 to present)
between Lehmans Emerging Markets and U.S. Credit Indices, the High Yield and U.S.
Credit Indices, and the International Cross-Over Bond (ICBI) and U.S. Credit Indices.
Best and Worst Performers YTD (Absolute EM Index Excess Return)The
absolute Excess Returns for the four best and four worst performers in the Emerging
Market Index for the year-to-date.
Information RatioThe ratio of Excess Returns to the volatility of those returns for
the Emerging Markets, High Yield, and U.S. Credit Indices.
Best and Worst Performers YTD (Contribution to EM Index Excess Return)The
four best and four worst performers (year-to-date) in terms of contributions to
Emerging Markets Index Excess Returns.
Total Returns for Select Asset ClassesThe total returns for the Emerging
Markets, High Yield and U.S. Credit Indices for the month-to-date, the past 3 months,
the past 6 months, and the year-to-date.
Annualized Total Return VolatilityThe volatility of Total Returns of the Emerging
Markets, High Yield and U.S. Credit Indices over 1-month, 3-months, and 6-months
and annualized.

Emerging Markets Index: Performance (Page 19)

1)

2)
3)

4)

Regional Comparison
a) Total ReturnsThe total returns of the Lehman Brothers Emerging Markets
Index and each of the regions in the Index for the month-to-date, past 3 months, past
6 months, and year-to-date.
b) Distribution by Market WeightThe distribution by market weight of each of the
regions in the Emerging Markets Index.
Total Returns: AmericasThe month-to-date and year-to-date total returns of each
of those countries in the Americas that are part of Lehmans Emerging Markets Index.
Total Returns: Europe, Mid-East, AfricaThe month-to-date and year-to-date total
returns of each of those countries in Eastern Europe, the Middle East and Africa that
are part of Lehmans Emerging Markets Index.
Total Returns: AsiaThe month-to-date and year-to-date total returns of each of
those countries in Asia that are part of Lehmans Emerging Markets Index.

Equity Market Indicators (Page 21)

1)
2)
3)
4)

United StatesThe NASDAQ (year-to-date) and the S&P 500 (which is rescaled to
correspond to Nadaq levels) against Lehman Brothers Emerging Markets Index.
AmericasThe Morgan Stanley Capital International (MSCI) Index for the Americas
(year-to-date) against Lehman Brothers Emerging Markets Index.
E. EuropeThe Morgan Stanley Capital International (MSCI) Index for Eastern
Europe (year-to-date) against Lehman Brothers Emerging Markets Index.
AsiaThe Morgan Stanley Capital International (MSCI) Index for Asia (year-to-date)
against Lehman Brothers Emerging Markets Index.

Currencies (Page 21)

1)
2)

Brazil RealThe Brazilian Real (year-to-date) against the Emerging Markets Index.
Polish ZlotyThe Polish Zloty (year-to-date) against the Emerging Markets Index.

Credit Market Indicators (Page 22)

1)
2)
3)

4)

Lehman Brothers

High Yield Mutual Fund FlowsHigh Yield Mutual Fund Flows from March 4, 1992
until the present, and an 8-week moving average of those weekly flows.
Downgrade/Upgrade RatioThe ratio of downgrades to upgrades by Moodys,
Standard & Poors and an average of the two agencies.
Moodys Trailing 12-Month Dollar Based Default Rate (Spec. Grade)The
percentage of speculative grade debt outstanding over time that has been in default
over the last 12 months.
Sovereign Credit Quality IndicatorsThe average of the numeric S&P and Moodys
sovereign ratings of each of the countries in our Sovereign Weightings list in the beginning
of this publication, weighted by the outstanding marketable debt of each country.

26

June 8, 2001

Index of Recent Articles

GLOBAL THEMES
June 8, 2001
June 1, 2001
May 25, 2001
May 18, 2001
May 4, 2001
April 27, 2001
April 20, 2001

THE AMERICAS
January 19, 2001
Argentina
June 8, 2001
June 1, 2001
May 18, 2001
May 11, 2001
May 4, 2001

Brazil
April 5, 2001

Argentinas Megaswap:
A Post Mortem
Effect of the Mega-Swap on Argentinas
Financing Needs
Argentina: Swap from the Swamp
The Argentine Malaise Lingers On,
but Not for All Credits
Argentina Holds the Sovereign
Market in Suspense

March 23, 2001

British Columbia
May 25, 2001

Reinvigorating Politics in British Columbia

Colombia
January 26, 2001

Bulgaria
May 25, 2001

Bulgaria: Are Election Worries Receding?

Cote dIvoire
November 3, 2000

Cote dIvoire: Waiting for Political Stability

Poland
October 13, 2000

Poland: Election Fallout

Russia
May 11, 2001
April 5, 2001
February 16, 2001
January 12, 2001

Russia: Structural Policy Update

Russia: IMF Confusion
Russia: Paris Club Victory
Russia: Increased Default Risk?

Turkey
May 18, 2001
May 18, 2001
May 4, 2001
April 20, 2001
April 20, 2001
March 16, 2001

Turkey: Unfavorable Debt Dynamics

Turkey: Will It Work?
Turkey: IMF Rescue . . . Again
Turkey: Something Has to Give
Turkey: Shifting Political Sands
Turkey: Dervis to the Rescue?

Ukraine
June 1, 2001
February 16, 2001

Ukraine: Is the Storm Over?

Ukraine: Heading Toward a Debt Crisis?

Quebec: Changing of the Guard

Brazil: The (External) Crisis That

Will Not Come
Brazil: COPOMDoing the Right Thing

Chile
May 11, 2001

EASTERN EUROPE/MID-EAST/AFRICA
March 9, 2001
Emerging Europe: An Overview
January 19, 2001
Europe, Middle East, and Africa:
Financing Requirements for 2001

Lets Play the Ratings Game

Blah, Blah, Blah
Swap Fever
Is It Time to Switch from
Fixed-Coupon to Floating-Rate Bonds?
Argentina Holds the Sovereign
Market in Suspense
Dont Worry, Be Happy
Even the Fed Cant Hide the
Witches Warts

ASIA
May 4, 2001

Chile: Not Guilty By Association

Indonesia
April 27, 2001
Japan
March 30, 2001
February 9, 2001

Mexico
June 1, 2001
May 25, 2001

Mexico: Lower Growth, Lower Deficits,

Less Inflation
Mexico: Good Policy and Luck

Panama: Less Wind in the Sails

Panama: Its Time for a Switch

Peru
June 8, 2001
March 30, 2001

Peru: Here Comes the Sun?

Peru: APRA-Cadaver ?

June 8, 2001

Hedging Japan Risk: Higher

Beta Choices
Japanese Bank Capital Ratios: New
Accounting Procedures Add Pressure

Ecuador: Debt or Alive?

Panama
May 25, 2001
March 2, 2001

Trinidad & Tobago

February 16, 2001

Indonesias Fiscal Tightrope

Colombia: Rescuing the Peace Process

Corporacin Andina de Fomento

May 4, 2001
Dont Blink: CAF Gets Upgraded Again
Ecuador
February 2, 2001

Asian Fundamentals Are

Getting Squeezed

Korea
March 2, 2001
February 16, 2001

SK Corporation (Baa3, Stable/NR)

A Korean Puzzle

Pakistan
October 20, 2000

Pakistan: Debt Restructuring

Philippines
March 16, 2001
January 26, 2001
Thailand
January 12, 2001

Philippine Telecoms:
Time for Another Look
The Philippines: Bottom in Sight?

Thailand: Political Turbulence

Could Be Hot Air

Peaceful Resolution to the

Political Impasse in Trinidad & Tobago

27

Lehman Brothers

Sovereign Strategy

Rob Gvozden
Costas C. Hamakiotes, Ph.D.
Robert McAdie, Ph.D.
Kaushik Rudra
Marco Santamaria

Reto Bachmann
Corinne Bethke
Giuseppe Di Graziano
Nicole Sermier

Asia, High Grade Sovereigns

Fixed Income Strategy
Fixed Income Strategy, Europe
European Sovereigns
Latin American Sovereigns

212-526-6310
212-526-8082
44-207-260-3036
44-207-260-1767
212-526-7036

44-207-260-3036
212-526-8469
44-207-260-2589
212-526-7804

Publications: L. Pindyck, A. DiTizio, B. Davenport, W. Lee, D. Kramer, S. Bryant, J. Threadgill, R. Madison, A. Acevedo
This document is for information purposes only. No part of this document may be reproduced in any manner without the written permission of Lehman
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Brothers Inc. All rights reserved. Member SIPC.

MONTHLY SOVEREIGN STRATEGY COMMENT

Lehman Brothers is pleased to invite you to a monthly on-demand
multimedia presentation on the Internet as a webcast. On the first Monday
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sovereign views and discuss our sovereign fixed income investment
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you will be able to access this presentation at two different sites:
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