Brazil Halts Debt Payments; Argentina May Follow Suit

President Jose Sarney announced Friday that Brazil is suspending interest payments on its foreign debt and will take a firm stand in negotiations for easier repayment terms.

Within hours of Sarney’s statement, a top official in Argentina said his country could follow suit and suspend payments on its $53 billion of foreign debt if commerical banks refuse its request for finance needed to meet growth targets.

Treasury Secretary Mario Brodersohn said he was reasonably confident that Argentina would reach an agreement with the steering committee of its creditor banks in New York next week.

But, he added, “if the international banks don’t grant us the $2.15 billion we asked for, priority will be given to growth of the gross domestic product rather than meeting foreign debt payments.” Delays in Brazilian payments are of major concern to international financiers because Brazil’s total foreign debt of $109 billion is the largest of any developing country.

No Surprise

The suspension, which was forecast in news reports Thursday, will halt all payments for an unspecified time on an estimated $70 billion in loans from private foreign banks. Citibank, Chemical Bank and Chase Manhattan are Brazil’s biggest creditors among American institutions, which hold most of the private loan paper.

The decision apparently applies only to loans from private foreign creditors and not those from foreign governments and multinational lending institutions. In January, Brazil negotiated softer terms for repayment of debts to governments of industrial nations. Negotiations are expected to begin next week in the United States on Brazil’s debts to private foreign lenders.

“We are going to negotiate a formula for amortizing our obligations within parameters that do not compromise our national development,” Sarney said on national television and radio Friday night.

In order to pay its debts, he went on, Brazil will not squeeze its domestic economy to the point of causing recession, unemployment and lower standards of living for workers. “We cannot pay the foreign debt with the hunger of the people,” he said, echoing the position of some other Latin American governments that have reduced debt payments.

Export Earnings Cut

Sarney said growth in domestic consumption and poor harvests in 1986 reduced Brazilian export earnings by more than 10%. As a result, the country’s monthly foreign trade surpluses have dropped from more than $800 million to little more than $100 million.

In recent months, Brazil has had to dip into its foreign reserves to make interest payments on the debt. About $800 million in interest is due each month.

Sarney denied that the country is facing an immediate foreign reserve crisis, but he acknowledged that reserves have dropped from $7.8 billion when he took office in March, 1985, to a current $3.96 billion.

“This is not a confrontational attitude,” he said. He added that Brazil, the “eighth-largest economy in the Western world,” does not want to cut off economic relations with the rest of the world. But “it does want just negotiations.”