The fourth quarter of 2002 saw an increase in investor optimism, especially in October and November. The combination of declining risk aversion and a technically well-positioned market caused a rally in emerging debt markets. In Latin America, markets traded strongly following the elections in Brazil and Ecuador. Brazil enjoyed a dramatic improvement in investor sentiment after the elections, supported by the new government's commitments to continue fiscal and economic reforms, as well as the global easing of credit conditions . Although sovereign spreads remained wide, Brazilian borrowers were quick to return to international markets to refinance maturing debt. Venezuela, on the other hand, faced increasing investor pessimism as a lingering nationwide strike against the government, coupled with the prospect of war in Iraq, further damaged the expectations about the strength of the economy recovery. With the exception of Argentina, Ecuador and Venezuela's spreads, which widened in December, all Latin American spreads tightened in the fourth quarter. Latin America's access to international capital markets also improved significantly in the last quarter of the year. After falling to an all times low in August, new debt issuance reemerged in the final months of the year. The wave of new emerging markets debt issuance at the end of 2002 (US$11 billion in November and December alone, according to Merrill Lynch, much of it pre-financing for 2003), coupled with the high issuance levels in the beginning of 2003, left most sovereign frequent issuers in quite good shape from a funding perspective. The increased supply of international emerging markets debt in the last quarter of 2002 reflected favorable borrowing terms in an environment of spread tightening and increased demand. Reflecting the improved borrowing conditions, the high number of credit rating downgrades that took place in Latin America in the second and third quarters came to a halt, and there were no credit rating changes in the fourth quarter. With Venezuela being an exception, 2002 ended with a sense that many of the uncertainties that prevailed throughout the year, such as the electoral cycle and its associated political risks, were left behind. However, uncertainties remain with respect to the outlook for the global capital markets later in 2003, given the war in Iraq and the repercussions it may have over oil prices, the global economy and investor risk aversion. Given current conditions, developments in Brazil, considered to be critical for the Latin American region's near future, as well as for the performance of most emerging markets portfolios in 2003, seem to be more a function of the level of investor's risk aversion than of domestic developments. Notwithstanding, according to some analysts, Brazil is now no longer viewed as leading the market to the brink of disaster, nor is it determining the rest of the market's fate . Brazil may be on the verge of reentering a virtuous cycle, although the conflict with Iraq poses an important near-term impediment to further improvements in risk appetites.