-- [B] BRIDGE FOCUS: Peru's political uncertainty worrying Wall Street -- By Felix Salmon, BridgeNews New York--Sept. 18--Political uncertainty in Peru in the near term and for the foreseeable future is a negative for the country's assets, Wall Street analysts say, even if the departure of President Alberto Fujimori turns out to be a good thing for democracy and Peru in the long term. Peruvian debt was slammed in early trade Monday. * * * As the United States was welcoming Peruvian President Alberto Fujimori's announcement that he was calling new general elections in which he would not run, the markets were dumping Peruvian bonds, worried about extreme political uncertainty in the country for a minimum of six months, and possibly more. "This is clearly bad, I think," said Jose Cerritelli, associate director at Bear Stearns in New York. "I think what it does is it brings to the surface a lot of problems that have not been visible before." The chief worry in the markets is political uncertainty. No one knows what is going to happen in Peru: Will Fujimori stay on as president until the new elections, or hand power to his vice president? When will the new elections be held? Who will the main presidential contenders be? What will the new Congress look like? One problem is that Fujimori has spent much more time running the country on a short leash than he has building up the institutions of a civil society, including mechanisms for an orderly, free and fair election. "It would have been better for the democratic institutions to have been built," noted Michael Gavin, head of Latin America research at UBS Warburg. Analysts also are worried about what is going to happen to Peru's program of economic reforms. "In the past, structural reforms and austere macroeconomic policies have been passed because of the authoritarian nature of the government. But now, trying to develop consensus for those macroeconomic policies in a much less authoritarian regime will be much more difficult," said Cerritelli. Much of the Peruvian population will be hoping that the era of fiscal austerity will end with the departure of Fujimori. "People are out in the streets not only because they like democracy, but also because they are hungry," says Cerritelli. Certainly, the debt markets were downbeat on the news, with Peruvian Brady bonds falling as much as 4 points from Friday's already-depressed closing levels. The benchmark Flirb bond was trading at 58 1/2 in early Monday trade, down 3 5/8 from Friday's close. The Peruvian general index dipped some 2.56% in early trading, as market players attempted to make sense of the newly announced presidential elections. The political uncertainty is expected to weigh on the stock market in the medium term until some clarity emerges on the electoral front, market players said. "We're now in a period of extreme uncertainty," said Alicia Duran, sovereign strategist at Merrill Lynch. "The immediate uncertainty is the coupon payments. It couldn't have happened at a worse time." Peru missed Sept. 7 an $80 million coupon payment on its Brady bonds, worried that the funds would be seized by Elliott Associates, a New York investment firm that had a court order allowing it to attach the funds. The country has a 30-day grace period in which to pay bondholders. Most analysts are still hopeful that the coupon payment will be made. Michael Gavin said that "the coupon payment is a technical issue that probably will not be affected by the political uncertainty," while Merrill's Duran notes that "Fujimori does not want his legacy to be the president who defaulted on Brady debt." ARMED FORCES' ROLE DOWNPLAYED One area about which analysts were not particularly worried was that of Peruvian national security and the armed forces. Duran noted that they did not interfere with demonstrations in the streets of Lima during the weekend, and the consensus seemed to be that Fujimori had successfully vanquished Peru's terrorists to a degree that they were unlikely to re-emerge in his absence. "We will have a more independent military and the consensus is clear that the role of the military is in these national security areas," said Cerritelli. Cerritelli also noted that it would not be in the leftists' best interests to start acting up in the immediate future. "I don't think the insurgents are going to want to insurge at the moment," he said. "In Peru, the left wants to be seen as civilized and responsible. All you need is a few car bombs and that will elect, if not Fujimori, then someone similar." CHANCE FOR DEMOCRATIC REFORM SEEN POSITIVE In the long term, however, there were hopes that true democracy would be good for Peru. "It's not the worst possible scenario, that would have been Fujimori retreating into some sort of a bunker and trying to stick it out against pretty formidable opposition," said Gavin. "Medium-term this could turn out well. We needed an exit scenario for Fujimori." And Pablo Marino, a portfolio manager at the International Investment Group, who overseas some $75 million in emerging markets investments, said that "anything indicative to the investment community and to world markets that Peru is becoming more democratic and more politically open is a net positive." Vincent Truglia, managing director for sovereign ratings at Moody's Investors Services, said that "in general, the stronger the democratic framework in a country, the easier it is to deal with complicated economic environments." Moody's outlook for the country remains stable at Ba3, he said, and the present political upheaval was unlikely to alter that. However, said Truglia, "the coupon payment is a very complicated issue," and should Peru reach the end of the grace period without having made the payments, the country's ratings might change. Truglia said that Moody's was following the situation in Peru very closely, and that speculative-grade ratings such as Peru's were by their nature more volatile than investment-grade credits. Merrill's Duran summed up the general mood, weighing democratic concerns against political volatility: "Long term I think it's probably positive, only because this is going to put an end to 10 years of concern about Fujimori's autocratic style." "But short-term and medium-term, it's negative." End (Back) to felixsalmon.com