ECONOMIC SPOTLIGHT - BRAZIL DEBT DEADLINES LOOM
Slow progress in talks between Brazil and
its major foreign creditors has increased the likelihood that
U.S. banks will declare their loans to Brazil non-performing at
the end of the quarter, bankers said.
    Several banks, citing Brazil's suspension of interest
payments on 68 billion dlrs of its 108 billion dlr foreign debt
and the absence of a coherent economic plan, have already said
they might take such a step, even though it would cost them
tens of millions of dollars in profits.
    An inconclusive meeting here March 22 between central bank
governor Francisco Gros and Brazil's bank advisory committee
can only have stiffened that resolve.
    A nasty row is also looming over 16 billion dlrs of trade
and money-market lines which Brazil froze last month.
    The legal commitment to maintain these credits runs out on
March 31, and the worried talk at the Inter-American
Development Bank annual meeting here is that some disgruntled
bank will sue for repayment, raising the specter of a cascade
of lawsuits and tit-for-tat asset seizures.
    "My gut feeling is that common sense will prevail. But is
there a risk? Yes, the mood out there is pretty nasty," one New
York banker commented.
    Two or three years ago, a showdown between the world's
largest debtor and its largest creditors would have sent shock
waves through the financial markets. But no longer.
    Some U.S. money-center bank stocks fell by about 10 pct in
the immediate aftermath of Brazil's payments halt. But, in the
Eurodeposit markets, which bankers consider to be the most
sensitive gauge of confidence, there was no discernible flight
out of bank instruments and into safer government bonds.
    In fact, the system has calmly withstood the suspension, in
part or in full, of interest payments by countries owing about
150 billion dlrs of the region's total foreign debt of 380
billion.
    Peru, Ecuador, Bolivia, Costa Rica, Honduras, Guatemala and
Nicaragua had all curtailed payments before Brazil.
    The explanation for the fairly relaxed view is that net new
bank lending to Latin America has dried up at the same time as
banks have steadily bolstered their capital base. As a result,
exposure relative to capital has fallen and few now fear for
the collapse of a major bank.
    That is why, banking analysts have said, Citicorp <CCI>
felt emboldened to state early in the day that it might put
Brazil on a cash basis even before interest becomes 90 days
overdue. It would forfeit 190 mln dlrs of profits this year as
a result, but for a company which earned over a billion dlrs in
1986 the setback would be manageable.
    Some other banks are not as strong, however, and a
protracted confrontation with Brazil could still seriously
erode depositor and investor confidence, especially if other
debtors are emboldened to follow suit and press for debt relief.
    Bankers are thus working hard to isolate Brazil. Financing
agreements were reached recently with Chile and Venezuela, an
accord with the Philippines seems to be close at hand, and a
deal with Argentina on new loans and a debt restructuring could
be reached in the next two weeks, bankers say.
    In taking a hard line against wholesale debt relief, the
banks have the clear backing of the Reagan Administration. "All
of us have a stake in the stability of the world banking system
- a debt forgiveness plan that damages commercial banks also
weakens confidence in world financial stability," U.S. Treasury
Secretary James Baker told the IADB meeting.
    Some European bankers, however, argue that capitalization
of interest is already happening in practice and that the banks
ought to face up to the fact and work with the debtors on
longer-term solutions that recognize that not all the interest
can be paid back right away.
    Rigid accounting rules have prevented U.S. banks from
seriously considering adding interest to the principal of a
loan because they would have to declare the loan
non-performing. But, Brazilian central bank governor Gros said,
if the banks are now volunteering to take that step, they might
be more willing to discuss new ideas for debt relief.
    "It's not necessarily an unfavorable development," Gros
said when asked about the prospect of Brazilian loans being put
on a cash basis.
    "We find more room to discuss these things (innovations)
with European banks which have already bitten the bullet."
     What is clear, however, is that banks are so angry and
frustrated with Brazil that they are in no mood to offer quick
concessions.
    A long war of attrition on the debt front lies ahead.
 Reuter
