Brazil's electoral outlook and the external backdrop were the main drivers of Latin American credits in the third quarter of 2002, thus the performance of Latin American markets continued to be pressured by Brazil's fate and the ebb and flow of investors' risk appetite. The region had a rare month of outperformance in August, as the prompt negotiation of an IMF agreement for Brazil and the moderation of global risk aversion brought strong returns for Brazil, in particular, and for countries considered high-risks in general. However, risk aversion peaked again in September, returning to near-historical highs. Emerging markets debt trading volume during the third quarter were at the lowest level reported to the Emerging Markets Trade Association in over two years, and analysts attributed the low volumes to greater investor caution and high risk aversion. Latin American spreads widened in July, tightened in August and raised sharply in September, following the increase in Brazil's volatility as the electoral outlook neared its definitional stage. Latin America's access to international capital markets remained difficult in the third quarter. Although new debt issuance in July recovered mildly from the decline in June, it was close to nil in August, moderately picking up in September. The number of downgrades that took place in July and August reflected signs of contagion from Brazil. Standard & Poor's downgraded Peru's foreign currency debt's outlook from positive to stable in July, cut Brazil's sovereign rating to B+ (from BB-), aligning it with those of Moody's and Fitch, and also cut Uruguay's rating at the end of the month to B (from BB-). Moody's also downgraded Uruguay's rating in July by two notches, to B1. Over half of the issuers on negative credit watch by Standard and Poor's at the end of July were Latin names, and industrials were the most prominent sector. In August, Fitch revised the outlooks for El Salvador, Peru and Colombia's sovereign ratings to negative from stable, and Moody's downgraded Brazil's foreign currency debt to B2 (from B1). Finally, in September, Venezuela was downgraded by Moody's as a result of its increasing political instability, which, according the rating agency, could lead the credit towards a slow process of deterioration. Although Latin American markets have not decoupled from Brazil yet, the correlation of emerging market bond movements with developments in Brazil decreased in the third quarter. The level of contagion from Brazil declined particularly outside Latin America, despite Brazil's higher volatility. Brazil's correlation with Latin American countries remained significant, nonetheless, even if down from the high levels of the second quarter.