Brazil’s embattled political leaders appeared to have won their game of brinkmanship with some of the world’s top bankers. Last week an eight-month standoff between Brazil and its creditors ended with the South American nation agreeing to repay a small part of the interest it owes on $90.4 billion of foreign borrowing. Brazil had suspended interest payments last February in the midst of a growing domestic economic crisis. The new arrangement protects U.S. banks, which
bankers had deteriorated steadily since a civilian government took control of the country in early 1985 and debated the legitimacy of the huge debts amassed during 21 years of military rule. After months of fruitless negotiation, Brazil announced on Feb. 20 that it was suspending interest payments on $90.4 billion in foreign bank loans, including $7.1 billion from Canadian creditors. Since then, unpaid interest has soared to $6 billion.
Under the terms of last week’s settle-
otherwise would have had to acknowledge officially that at least part of their $37 billion in loans to Brazil was uncollectible. But at the same time, the achievement came at the expense of the major commercial creditors, including six Canadian banks: they will have to lend the country part of the money it needs to make the interest payments. And a permanent end to Brazil’s enormous debt problem seems almost as distant as before.
Even so, the country’s creditors generally welcomed the agreement as a breakthrough in an increasingly bitter dispute. Brazil, said one Canadian banker, “will be persuaded to play ball” on the rest of its debt. Added Penelope Hartland-Thunberg, an economist with Washington’s Center for Strategic and International Studies: “The agreement buys time for the banks and Brazil.”
Relations between Brazil and its
ment, Brazil will be required to pay only about 33 cents on each dollar of interest owed. Brazil and its creditors, including the six Canadian banks, were persuaded to accept the compromise that was proposed by officials of the U.S. treasury department and the Federal Reserve Board in October. Under that plan, Brazil will pay $2 billion in interest costs and the banks will lend Brazil an additional $6 billion to make further interest payments. The money will be released to creditors as the two sides make progress toward a permanent agreement. Meanwhile, Brazil will resume full interest payments on its own next year. The South American country appears to have struck a winning deal, but one Canadian banker insisted that “as long as we loan Brazil less than we receive, we are not financing our own interest repayments.”
But the settlement pushed the diffi-
cult task of rescheduling repayment of Brazil’s $90.4-billion commercial debt into 1988. Even so, some observers said that both sides hinted at key compromises that may make a rescheduling deal easier. For their part, the banks appeared willing to write off some of their loans to Brazil, while Brazil seemed to soften its opposition to demands that the International Monetary Fund (IMF) be allowed to oversee its future economic policy. In the past the Brazilians had opposed monitoring by the IMF. Its initials appeared on placards during antimilitary demonstrations in 1983, representing IMF as Inflacäo, Miseria, Fome—Inflation, Misery and Hunger.
Meanwhile, the new pact offers relief for both sides in the debt dispute. The U.S. banks clearly had their backs to the wall. With Brazil refusing to make payments on its loans, U.S. bank regulators had threatened late last month to declare those loans “value-impaired.” That designation would have forced the banks to set aside up to $7.5 billion against the socalled bad debt.
Still, critics charged that the agreement merely allows Brazil to repay old loans with new borrowings. Said Roy Culpepper, an economist with the Ottawabased North-South Institute specializing in international finance: “It’s just a bookkeeping transaction. The banks are paying themselves interest.” Added Brazilian economist Ibrahim Eris, a former negotiator for Brazil on its foreign debt: “This simply avoids a disaster for U.S. banks.”
At the same time, political uncertainty in Brazil could still stall a permanent settlement. Brazilian President José Sarney’s popularity has plummeted as a succession of economic failures allowed inflation to reach 260 per cent a year. And a constituent assembly charged with drafting a new constitution appears poised to choose a parliamentary form of government that would further reduce Sarney’s power. Both developments will make it difficult for the president to deliver on his negotiators’ unpopular promise to accept IMF supervision as the price tag of settling Brazil’s debt.
-CHRIS WOOD with WILLIAM LOWTHER in Washington and RICHARD HOUSE in Sâo Paulo
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