Brazilian Stocks Lead Rally

Latin American stock markets rallied sharply Monday, led by Brazil, even as Argentina moved closer to a technical default on its massive national debt.

The Sao Paulo Stock Exchange’s benchmark Bovespa stock index rocketed 6.8% to close at 12,164.6, the highest since Sept. 6. It was the market’s second-biggest one-day percentage gain this year.

Brazil’s currency, the real, jumped to 2.6 per U.S. dollar from Friday’s 2.67, and now is at its strongest level since Sept. 7.

Among other Latin American markets, Argentina’s key share index rose 3.7% and Mexico’s gained 0.9%.

Argentina said Monday that it will offer holders of $60 billion of bonds new securities that have longer maturities and pay lower rates.

The exchange, which credit-rating agencies have said would be tantamount to a default, is aimed at domestic bondholders. The new obligations will pay one-third the interest of the old debt and mature three years later than the current debt, Economy Minister Domingo Cavallo said.

The government will provide more details today, and later will announce another swap targeting international bondholders.

Argentina plans to restructure at least $95 billion of bond debt to regain investor confidence and reduce financing costs to start reviving the $280-billion economy, which has been mired in recession. The country needs to reduce the amount of outstanding bonds by as much as 47% to be able to pay its debts, economists say.

“The only thing we are seeking is to ensure payments over a viable base,” Cavallo told business executives at the state-owned Banco de la Nacion. “It’s a question of telling the truth.”

But the prospect of default has held back Latin American stock markets in recent weeks, even as most major markets worldwide have rallied strongly.

Now, some analysts say, the idea of some resolution to the Argentine situation--even if it means default--is encouraging some investors to jump back into battered stocks.

“We are going to have, in the coming days, an agreement on the Argentine debt renegotiation, and that is making the market more calm,” said Bonval brokerage director Celso Senise in Sao Paulo, Brazil.

Argentina has for weeks been demanding that domestic banks and pension funds swap out bonds they own as a first step toward a similar exchange for bonds held overseas.

“The banks are under pressure to do it,” said Rafael Ber, an analyst at Argentine Research. But “individual investors are not likely to go for this.”

Credit-rating agency Standard & Poor’s has said that any exchange that reduces the value of investors’ holdings would be considered a default, though the government has rejected that characterization.