BANK MONTREAL REASONABLY OPTIMISTIC ON BRAZIL
Bank of Montreal <BMO.M> Chairman
William Mulholland said he was reasonably optimistic that debt
negotiations between Brazil and its commercial bank creditors
can be accomplished satisfactorily in the long run.
    "It's going to be a bit rocky short term ... a couple of
months ... but I am reasonably optimistic longer term," he told
a press briefing here.
    Earlier, Mulholland announced that Bank of Montreal has
formally applied to swap up to 100 mln dlrs of its roughly one
billion dlr cross border exposure to Brazil into local equity
investments under a novel conversion scheme.
    Tensions have been running high between Brazil and its bank
creditors since President Jose Sarney imposed a unilateral
suspension of interest payments on some 68 billion dlrs of
commercial bank debt on February 20, bankers said.
    Only yesterday, three leading U.S. banks voluntarily put
their Brazilian loans on non-accrual status and took a hefty
cut in net income for the first quarter ended March 31.
    Bankers saw this as a clear refusal to be intimidated into
granting major concessions as forthcoming refinancing talks.
    Bank of Montreal's Mulholland regretted Brazil's action but
declined to discuss what action his bank might take.
    Mulholland merely said that Bank of Montreal had not
canceled any of its short-term credit lines that came up for
renewal on March 31.
    However, John Bradlow, senior vice president of the
corporate and goverment banking division, said that it was
possible that Bank of Montreal might follow the U.S. banks'
lead in its second quarter results accounting.
    "A decision will be made at April 30 or in the first weeks
of May," he told reporters after the briefing. Unlike most
major U.S. banks, whose reporting year ends on December 31,
Canadian banks operate on a November through October basis.
    At the press briefing, Mulholland detailed the proposed
debt/equity conversion scheme, which is aimed at boosting
investment capital and conserving foreign exchange reserves.
    Unlike many existing programs, Bank of Montreal intends to
sell its own dollar-denominated debt at par to either the
obligor or local investors for cruzados, which would then be
ploughed into Brazilian assets.
    Mulholland said current debt/equity schemes, in which bank
debt is often sold to foreign third parties at a discount, were
like "peddling off debt at fire sale prices". He added that
they could do pyschological harm to investor confidence.
    While acknowledging that Brazil has yet to give its
official blessing to the plan, Mulholland predicted, "if it is
supported, we are going to see more of this."
    Sources at other large banks with sizeable exposure to
Brazil were not so sure about the scheme's success.
    "I don't think it's going to fly because of the impact it
would have on money supply and other political reasons," said
one banker, noting that earlier informal proposals along the
same lines received "fairly neutral responses."
    "And is there a market for such investment in a time of
great uncertainty," he added.
    Mulholland admitted, "it is something of an experiment....
some one has to screw up the courage and do something."
    "It is very important that avenues (to reversing net
capital outflows) are broadened," he added, noting that in
recent years the options have in fact been narrowing.
    Another senior banker agreed that debt/equity swap
proposals, such as Bank of Montreal's, should be explored and
developed but warned that Brasilia has been "very ambivalent"
about debt/equity schemes thus far.
    The banker added, "debt/equity conversion should happen but
it is not a major instrument for solving debt problems."
 Reuter
