LTP Trade Finance IndexÖ - August performance update

These developments - plus a 19bp fall in dollar libor, helped deliver a total return of 0.55% for the calendar month, the second highest in 2002.

Short term credit spreads tightened by 25bp in both Russia and Turkey, two countries with relatively high weightings in the Index portfolio, and by similar amounts (but with less effect on the overall Index margin) in the Czech Republic and Croatia. Overall, the Index margin tightened by 5 basis points to 186 over US$ LIBOR, hopefully indicative of a recovery in investor confidence following a nervous summer.

Downward pressure on Russian credit margins comes as no surprise, given a secure macroeconomic position and continued evidence of reform and modernisation at the company level, in both the corporate and banking sectors. The Russian government's macro forecasts to 2005 - which indicate further steady economic growth - are built on relatively conservative assumptions, including an average oil price (Urals Med) of US$18.5/bbl. War in the Middle East could yet derail this rosy scenario, but today's Russia enjoys a high degree of protection from global events. The same can hardly be said for Turkey, still wholly reliant upon IMF (and ultimately US) support, and likely to be directly involved in any US adventurism in Iraq. Trade finance investors continue to demonstrate capacity to finance Turkish risk, but with domestic (parliamentary elections) and regional (Iraq) stability likely to be sorely tested during the remainder of 2002, secondary market pricing - and liquidity - could prove volatile.

In Latin America there have been faint indications of better times ahead, although in practice the international debt markets will remain skittish until Brazil's next President is elected. In that race, market-friendly candidate Serra - for some time languishing a weak third to candidates Lula and Gomes - has enjoyed better poll results of late as the government TV campaign has got underway. If Serra can displace Gomes to win through to a second round run-off with Lula, he may yet be in with a chance of success. Meanwhile, the IMF's decision to reschedule (for 12 months) US$ 2.8 billion due from Argentina this year is a positive development, and will hopefully lead the way to a wider-ranging deal.

The following table breaks down performance between capital appreciation and interest accrual - (note that, because of compounding effects, the constituents may not sum to the total).