NEW YORK, Oct 27 (Reuters) - Many on Wall Street were willing to give Brazil's Luiz Inacio Lula da Silva the benefit of the doubt as the next president of Latin America's largest nation, but some remained nervous that the one-time socialist firebrand may revert to his old ways once in office.
With more than half the votes counted in Sunday's election, the former metal worker and union boss -- the mention of whose name caused heartburn among investors only a few months ago -- had 60 percent of the votes.
Brazil's drooping asset prices already reflect considerable worry that Lula will mismanage Brazil's economy and blunder toward default on the nation's $260 billion debt.
"Wall Street is looking to see if the Lula who takes office is the more moderate, forward-thinking person who appeared in this campaign or if he reverts to his life-long leftist stance," said David Roberts, senior international economist at Banc of America Securities.
"If he gives the right signals, there could be a significant recovery in Brazilian asset prices," he said.
Investors started 2002 convinced Lula would fade late in the campaign and lose to a more moderate candidate, as he had done in the previous three presidential elections. But he appealed to voters this time around by taking a more moderate stance himself.
Lula would become Brazil's first working-class president and his victory would mark a turning point for the country -- and possibly for the rest of Latin America -- where power has traditionally been held by the military or the small, wealthy elite.
Brazil's election may have ripple effects throughout Latin American markets.
"With the big exception of Mexico, Latin America has serious financing problems," Roberts said.
"If the market turns against Brazil, countries like Venezuela, which already has a populist president, and Peru, which has had problems financing itself in the international capital markets, will suffer even more," he added.
Lawrence Krohn, head of Latin American sovereign research at ING Financial Markets, said Lula's chances of success are in the hands of the currency market, which may or may not support the Brazilian real between now and January when he is sworn in.
"If pressure on the real continues into year end, the economy he inherits will be so damaged that it will be very difficult for him to succeed," Krohn said.
"On the other hand, if there is a sustained rally in the currency it will bring with it lower interest rates and a lower debt burden, which will at least give Lula a fighting chance at avoiding default if his policies are sound," he added.
The real rallied 5 percent Thursday and Friday of last week, ending at 3.73 to the U.S. dollar going into the election, but remains 38 percent weaker for the year.
Brazilian bond spreads, which measure the risk of default as compared to safe-haven U.S. Treasury bonds, widened to a bruising 2,436 basis points in late September, when Lula's victory began to seem likely. Such wide spreads restrict economic growth by making it almost impossible for Brazilian companies to borrow money.
Since then, spreads have eased back to the neighborhood of 1,780 basis points as of the end of trade on Friday.
The two key questions going into the opening of the markets on Monday is how fast Lula outlines his policies and moves to appoint a transition team.
"The market has still priced in a high level of uncertainty with respect to both" questions, said Mohamed El-Erian, chief emerging markets portfolio manager at Pacific Investment Management Co. (PIMCO) based in Newport Beach, Calif.
"Lula inherits an economy at a critical juncture and what he does will have implications for the whole of Latin America," El-Erian said.
Lula may follow the examples of Chile and Mexico where major political transformations have been used to reinforce democratic institutions, El-Erian noted. But investors remain worried that Brazil could follow Venezuela and Argentina where political factors have helped undermined the economy.
"Given Lula's focus on economic growth and poverty reduction, he is more than likely to follow the examples of Chile and Mexico, but the market has a wait and see attitude," El-Erian said.