Bhutto killing worries Pakistan investors, markets

Former Prime Minister of Pakistan Benazir Bhutto of the Pakistani People's Party (PPP) speaks at a news conference with Nawaz Sharif of the Pakistan Muslim League (not pictured), following discussions on a political coalition, in central London in this October 19, 2006 file photo. Bhutto was killed in a gun and bomb attack after a rally in the city of Rawalpindi on December 27, 2007, her party said.

LONDON (Reuters) - Benazir Bhutto's killing will boost perceived risk in nuclear-armed Pakistan, analysts warned on Thursday, but some said it was not in itself surprising enough to substantially change investor sentiment.

News of her assassination in a suicide gun and bomb attack outside a political rally in the garrison city of Rawalpindi sent global gold and oil prices higher, also unsettling global foreign exchange markets.

"The killing of Bhutto will likely lead to further political and social instability in Pakistan and across the subcontinent," Swiss investment bank UBS said in a research note.

Credit ratings agency Standard & Poor's said Pakistan's sovereign foreign currency rating of B+ could be lowered if the assassination was followed by instability, making it more difficult for the country to borrow money in global markets.

"If this assassination ushers in a period of heightened political instability, the ratings will be lowered," John Chambers, chairman of S&P's sovereign rating committee, told Reuters in a telephone interview.

Pakistani five-year credit default swaps, used to insure against restructuring or defaulting debt, widened by around 100 basis points on the news, implying traders felt the country's debt was higher risk.

The attack took place after the Pakistani stock market closed for the day and with little trade reported on the Pakistani rupee. Both were seen potentially falling on Friday.

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"Politically it is bad news," said Shanat Patel, global emerging equities strategist at Nomura International in London. "We will have to wait and see what happens but it is unclear whether it will derail the economic reform process."

Pakistani forecasts growth of 7.2 percent in the year to June 2008, with the country classed by some as one of a new breed of lesser-developed "frontier markets" offering better returns than mainstream emerging markets such as Eastern Europe.

But some investors were already starting to worry after President Pervez Musharraf's Nov 3 declaration of emergency rule and another suicide attack on Bhutto on her return to the country killed at least 139.

"I think this is anticipated," said Jennifer Harbison, Asia desk head for London-based consultancy Control Risks.

"It is well within what we expected might happen... This is not Pakistan itself under threat. This is an assassination in an election campaign and has to be seen in that context."

The news would put off any immediate investment deals in Pakistan, she said, but most serious investors would already have been awaiting the outcome of the election scheduled for January -- which some now expect to be postponed.

But some other analysts were more apocalyptic, pointing to Pakistan's ongoing failure to control an Islamist insurgency in the north-west frontier province, its nuclear arsenal and sometimes fraught relations with fellow nuclear neighbor India, and warning it outstripped other global worries.

"The big take-away from this horrible event is that Pakistan could slide into a civil war of sorts," said Win Thin, senior currency strategist at Brown Brothers Harriman and Co in New York. "We can't think of a more scary situation in the region, and believe that the fate of Pakistan could have a much bigger impact on geopolitics that anything Iran could do right now."

(Additional reporting by Daniel Bases in New York and Carolyn Cohn in London)