Brazil Wants Half Its Foreign Private Bank Debt Converted Into Bonds

Brazil is proposing that half its debt with private foreign banks be converted into long-term government bonds at a discount of up to 30%.

In an interview published Thursday in a Brazilian newspaper, Finance Minister Luiz Carlos Bresser outlined the “innovative” proposal, which he said is aimed at ending Brazil’s debt moratorium. Since Feb. 20, Brazil has refused to make payments on about $70 billon that it owes to private banks abroad, mostly in the United States and Europe.

Bresser is scheduled to meet Tuesday in Washington with Treasury Secretary James A. Baker III. Fernando Bracher, an adviser to Bresser, will be meeting next week with foreign bank executives.

The meetings are expected to give Brazil an indication of whether its proposal will be acceptable in some form in negotiations later this month with a committee representing creditor banks.

“We still don’t have a finished proposal, but we will have when Brazil is meeting with the bankers, between Sept. 20 and 30,” Bresser said in the interview, which appeared in the newspaper Folha de Sao Paulo. A Reagan Administration official in Washington said the United States is likely to oppose the proposal in its present form but that he believes a compromise could be negotiated.

Bresser said the amount owed to private foreign banks would be divided into halves--with the half being converted to bonds being called “new debt” and the rest “old debt.” The new debt would be converted into 35-year bonds, with a discount of 25% to 30% from the nominal amount of the loans. The bonds would have a 10-year grace period, with payment of the principle spread over the 25 years.

“The discount of 25% to 30% could be temporary, because one of the alternatives will be for Brazil to pay back that discounted difference of 25% to 30% after the maturity of the bonds 35 years later,” Bresser said.

“We are going to say that if Brazil is able, it will pay back the discount, as long as it is developing and in a good position in its balance of payments,” he said.

He said the discount is justified because some creditors currently offer Brazilian loan paper on the “secondary market” at discounts of 45%. Brazil will give banks an “absolute guarantee” of repayment on the new bonds, he said.

“We cannot give the same guarantee for the old debt, which will continue to be negotiated under the old system,” he said.

Bresser reiterated a previous proposal to seek additional loans from the banks to finance interest due this year and next.

He has said, too, that Brazil will ask to refinance old loans at “zero spread” interest rates, equal to the London interbank rate (known as Libor).

In the newspaper interview, Bresser said some of the new debt could be converted into capital investment in Brazilian corporate stock. “The bankers will have a choice between long-term bonds and conversion of debt into risk capital,” he said.

Private foreign banks have proposed that Brazil enter into an economic stabilization agreement with the International Monetary Fund before they refinance any loans.

Bresser said Brazil will begin negotiations with the IMF only after concluding negotiations with the banks.