ILF iShares Latin America 40

By Carla Mozee

Latin American equity markets surged Monday, rallying alongside Wall Street after the U.S. government unrolled blueprints for getting rid of as much as $1 trillion in bad assets weighing on financial institutions.

The indexes finished at their best levels since early to late-February. The Bovespa index in Brazil jumped 5.9% to 42,438.55, adding to last week's climb of 2.7%.

Mexico's IPC leaped 5.1% to 20,346.43, Argentina's Merval gained 4.8% to 1,103.42, and Chile's IPSA rose 2.3% to 2,544.52.

Exchange-traded funds for the region also bulked up. The iShares S&P Latin America 40 Index Fund (ILF) and the iShares MSCI Brazil Index Free (EWZ) each rose 7.5%.

The iShares MSCI Mexico Index Fund (EWW) picked up 4.7% and iShares Chile Investable Market Index Fund (ECH) rose 4.2%.

On Wall Street, the S&P 500 Index leaped 7.1% and the Dow Jones Industrial Average advanced 497 points, or 6.8%, to 7,775.86.

Equity investors cheered the Obama administration's plan, which calls for a new public-private partnership to purchase toxic, or legacy, assets. The equal amounts of money to come from private investors and the Treasury would be backed by a loan guarantee from the Federal Deposit Insurance Corp. to buy loans and mortgage-backed securities from the banks.

The aim is to have banks recover enough so that they will begin lending again. Taxpayers and private investors would gain from any profits if the assets eventually gain value, but taxpayers would take most of the downside risk.

While stock prices soared, some analysts still stressed caution.

"The problem all along has been that the market value of these legacy assets is below the amounts carried on balance sheets, and selling at market prices would result in massive erosions of already thin capital," wrote Michael Gregory, senior economist at BMO Capital Markets in an note Monday.

"Presumably, Treasury's stress-testing exercise and ensuing capital injections will provide the incremental incentive for banks to sell. We'll see," he said.

Banking stocks in Latin America posted strong gains. Brazil's Unibanco (UBB) soared bounced 12% higher and Itau (ITU) rose 9.6%. Mexico's Banorte rose 4.3% and Inbursa gained 0.9%.

In Buenos Aires, Banco Frances (BFR) rose 4.6% and Grupo Financiero Galicia (GGAL) rose 1.9%. In Santiago, Banco Santander (SAN) gained 2.9%, but Banco de Chile (BCH) slumped 3.8%.

While banking stocks in the region have little direct exposure to so-called toxic assets, banking stocks have still been hurt because of an overall pullback in global credit conditions.

Back in Sao Paulo, shares of Gol Linhas Aereas Inteligentes (GOL) led the few decliners on the index. They slid 7.1% to 7.25 reals ($3.23), their lowest level since late October. The discount air carrier's shares were downgraded by UBS Pactual to neutral from buy, and the broker said in a note to clients that it appears it was "just plain wrong" to have upgraded them in December.

UBS noted that the shares have "significantly underperformed the broader tape" since December, and that Gol's fourth-quarter results and a $203 million capital increase through the issuance of 26 million new shares "point to poorer-than-expected prospects for equity holders."

Since the Dec. 17 upgrade, Gol's shares have declined 30% while the Bovespa has risen 6.2%.

Analyst Rodrigo Goes said in the note that while UBS continues to see the company on a recovery path, the fourth-quarter figures suggest "this process could take longer than expected to material on both costs" and revenue.

Fitch outlines pressures on LatAm; Chile ratings upgraded at Moody's

As regional stocks advanced, Fitch Ratings said economic pressures on Latin America are building because of the region's exposure to commodity prices -- which have "come down at a lightening pace" -- global recession and restrictions on capital.

"Good times are over and it's quite apparent with increased volatility we've seen in asset prices across the region over the past few months," said Shelly Shetty, senior director at Fitch Ratings, in a teleconference Monday about macro and sovereign credit trends in Latin America.

The agency expects real gross domestic product in the region to contract by 1.9% this year, and nine countries to record economic contractions. It said Mexican economic activity is likely to contract by 2.5% for Mexico, and that its "rosiest" growth outlook is in Peru, at 4%.

The region's prospects through trade, financial remittances and foreign direct investment channels will be hurt particularly because of the recession gripping in the U.S. economy, said Fitch.

"While external demand is losing steam, domestic demand can't be expected to be an independent engine of growth in smaller and more open economies," said Shetty, "and even in the bigger countries where domestic demand can arguably play more of a role, the domestic credit crunch could be seen as likely to cool off domestic demand."

In other agency developments Monday, Moody's Investors Service upgraded Chile's foreign-currency government bond rating to A1 from A2 with a positive outlook. The move reflects the country's "strong resilience" to external shocks related to both the government's "robust" foreign asset position as well as solid balance sheet that reflects the government's status as a net creditor, said the agency.

Weak economic growth in the near-term "itself was considered to be of limited relevance for the rating action as long-term ratings look through the business cycle and Chile's sound credit fundamentals are considered to be unaffected by this condition," said Mauro Leos, a Moody's vice president and regional credit officer, in a statement.

Chile's country ceiling for foreign-currency bonds was also upgraded, to Aa2 from Aa3. The country ceiling for foreign-currency bank deposits was raised to A1 from A2.