The blunt announcement sent Canadian bank stocks plunging. Brazil’s president, José Sarney, said that his government would suspend interest payments on the $90.4 billion in long-term debt that it owes to foreign banks. And bankers around the world expressed concern that other countries would follow suit. Indeed, shortly after Sarney’s statement two weeks ago, both Argentina and the Dominican Republic said that they were considering similar embargoes. Then Brazil acted again. It refused to pay the interest on another $18.6 billion in short-term debt. Said Finance Minister Dilson Funaro:
“We want to overcome our current economic crisis and not to be forced to live with it.”
Brazil’s action, designed to obtain. more liberal repayment terms from its creditors, was an attempt to deal with financial pressures that arose from the oil boom of the 1970s. At that time, said John McDonald, a banking analyst with Toronto’s Moss Lawson & Co. Ltd., international lenders were flush with cash earned by financing oil production and exploration. The money was loaned to developing countries, often with steep management and servicing charges attached. When the global economy went into recession in the early 1980s, many of those countries could only meet payment deadlines by adopting rigid domestic austerity programs. Now the indebted nations, fearing massive social upheaval under the continued austerity, are seeking easier ways to get out of debt. By forcing their creditors to accept more lenient terms, pegged in some cases
to a percentage of their gross domestic product (GDP), they will be able to spend more to stimulate their own stagnant economies. Altogether, Brazil owes $144 billion, including the $90.4 billion in long-term debt, to foreign governments and banks, includ-
ing $6.8 billion in debts to Canadian banks. If Brazilian officials succeed in forcing renegotiation of repayment terms, other countries with smaller debts are likely to take similar action. Said Alvaro Alencar, the Brazilian finance ministry’s co-ordinator of foreign affairs: “If Brazil opens new ways and seeks better solutions, bankers will have to think about giving similar treatments to other countries.”
Despite its debt burden, Brazil has
posted one of South America’s strongest economic performances in 1986. Its GNP grew at a rate of eight per cent annually, inflation was low, and demand for its products abroad generated a $1.35-billion trade surplus in May, 1986, alone. But at the same
time, interest payments on the country’s foreign debt have been heavy. Over the past five years Brazil has paid $55.8 billion in interest costs against a GDP now running in excess of $200 billion annually. But this year inflation is expected to reach 800 per cent, and the economy has slowed dramatically.
The rapid erosion of the country’s economy jeopardized the two-year-old Brazilian government—the first civilian administration in 21 years. Ana-
lyst McDonald, who spent seven years as an adviser to the Washingtonbased International Monetary Fund (IMF), said that the Brazilian leader would have to take drastic action to turn the country’s economy around. To accomplish that, Finance Minister Funaro said that the country wants to extend debt payments over longer periods and limit them to no more than 2.5 per cent of its GDP.
Brazil does have a precedent for balking. Last July Mexico, which had a $135.2-billion foreign debt, including $6 billion owed to Canadian banks, threatened to halt interest payments. But that crisis was avoided when the IMF arranged $16 billion in emergency funding for Mexico. But the Mexican bailout, said McDonald, was provided at interest rates running well below interest charges on money the banks have been extending to Brazil.
But Brazil’s relations with the IMF are strained. Sarney said last week that his country would accept an IMFdictated rescue package as part of the country’s debt renegotiation package, but that he would refuse to accept any direct IMF involvement in his country’s financial affairs. That impasse could prove to be a major stumbling block. Representatives from 14 international banks, working on behalf of all of Brazil’s creditors, have repeatedly asked the Brazilian government to agree to an IMF-monitored reform package before they lend the embattled country more cash or renew existing loans. But the nationalistic Brazilians say that such an IMF intervention is an intrusion into their country’s affairs.
Some Canadian investors, sensing a continued standoff, are selling off bank stocks. At one point last week the Bank of Montreal’s stock fell $1.50 to $33.50, the Royal Bank tumbled $1.13 to $33.13, the Bank of Nova Scotia lost 63 cents to $18.13, the Canadian Imperial Bank of Commerce 63 cents to $21 and the National Bank 25 cents to $15.75. The Canadian banks, however, are not in serious jeopardy. Last fall the inspector general of banks ordered the institutions to increase their loan-loss provisions on South American debt to 20 per cent of the cash they loaned to some debtor countries. But bank customers, says James Savary, an economist with the Consumers’ Association of Canada, may not fare as well. If the dispute drags on, he said that it could cost the banks millions in lost interest payments—which will be recouped at home by raising interest rates and service charges.
—TOM FENNELL in Toronto with correspondents’ reports
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