BUSINESS/ECONOMY

The banks get tough

D'ARCY JENISH June 8 1987
BUSINESS/ECONOMY

The banks get tough

D'ARCY JENISH June 8 1987

The banks get tough

In a televised address last February Brazilian President Jose Sarney declared, "We are not going to pay the debt with the hunger of the people.” With that, he indefinitely suspended interest payments on $90.4 billion owed by Brazil to foreign banks. Last week the impact of Brazil’s decision crystalized in Canada when four of the six biggest chartered banks

released second-quarter results. In a mere 13 weeks they lost a total of $80 million in interest income owed by Brazilian borrowers, and two of the four banks reported lower profits than during the second quarter of 1986.

But the most dramatic response to the Brazilian moratorium came from New Yorkbased Citicorp., North America’s largest bank.

Citicorp added a whopping $4 billion to its reserves against bad loans to developing countries, and that produced a stunning $3.4billion loss for the second quarter. In taking the action, Citicorp became the first major American bank to publicly admit that it may never recover all of its

loans to the developing world. Said Citicorp spokesman John Maloney: “This will cover what appear to be uncollectable loans.”

The Citicorp move clearly indicated the bank was rejecting past industry practice of piling new loans on top of bad debt in the hope that debtor nations would somehow repay it later. Instead, the huge bank, with assets of $263 billion in 1986, was in effect absorbing a heavy loss. By week’s end, other U.S. banks were falling into line. Chase Manhattan Corp. of New York and Norwest Corp. of Minneapolis strengthened and improved their loan-loss provisions by a collective $2.4 billion.

Until Citicorp’s move, the U.S. banks had not followed their Canadian, European and Japanese counterparts in setting aside ever larger reserves against developing-world loans. But Citicorp has jumped ahead of other American institutions by boosting its reserves to $3.6 billion against troublesome loans totalling $20 billion, including $6.2 billion to Brazil.

As a result, said John McDonald, senior financial analyst with Moss Lawson and Co. Ltd. in Toronto, Citicorp will now be better able to resist demands for concessions such as lower interest rates and longer repayment periods. While the Brazilian government shrugged off the Citicorp move

last week, some officials had previously threatened to expand the interest moratorium to $54 billion lent by international financial agencies such as the International Monetary Fund. Canada’s chartered banks have lent an estimated $27.5 billion to financially struggling Latin American and Caribbean nations, $7.1 billion of that to Brazil. Since late 1984 they have steadily increased loan-loss provisions, according to guidelines imposed by the federal Inspector General of Banks. Now, said research director Ian Ruxton, Canadian bank reserves currently ranging from 10 per cent to 15 per cent of the total value of loans to developing countries are being increased to 20 per cent by 1989.

But some observers say that the debt crisis could still seriously harm the Canadian banks. Terry Shaunessy, bank analyst with Merrill Lynch Canada Inc., said that most of the borrower nations have given up on repaying their debts and now cannot even pay interest.

The current international debt crisis is a legacy of the oil price shocks of 1973 and 1979, which transferred vast wealth to petroleum exporting nations. Their petrodollars were deposited with western banks, which then freely loaned the money to Latin American, Caribbean, Asian and African countries.

Third World loans had reached an estimated $1.4 trillion by the end of 1986, and 67 countries, owing $787 billion, were trying to reschedule their debts. The largest of the debtors was Brazil, with total borrowings of $144 billion, and Sarnay’s statement in February suddenly heightened the crisis.

Brazilian officials, including the new finance minister, Luiz Carlos Bresser Pereira, have hinted that the debt moratorium will last at least until the end of the year. Just prior to his appointment Pereira wrote in a newspaper article, “To negotiate we must not just use negative arguments such as threatening to continue with the interest payment suspension.” But until interest payments resume, the largest of the six Canadian chartered banks are losing as much as $13 million per month in revenue from Brazil, and their chances of ever recovering the money are clearly diminishing.

D'ARCY JENISH

with

RICHARD HOUSE

in

Sao Paolo and

LARRY BLACK

in New York

BANK OF ROYAL C.I.B.C. BANK OF TORONTO NATIONAL MONTREAL BANK NOVA SCOTIA DOMINION BANK