Brazil Scraps Its Controversial Long-Term Bond Debt Proposal

Brazil will drop its controversial proposal to convert half its debt to long-term bonds, which would have required banks to accept substantial losses on the nation’s $70 billion in outstanding commercial loans, Brazilian Finance Minister Luis Carlos Bresser Pereira said Tuesday.

Bresser Pereira, emerging from a two-hour meeting with Treasury Secretary James A. Baker III, told reporters that Brazil would “offer a voluntary system of (interest rate) discounts instead.”

Treasury officials, worried that financial markets were getting a misleading impression from some early reports suggesting that Baker had endorsed Bresser Pereira’s original approach, issued an unusually specific statement calling the proposal a “non-starter.” The officials pointed out that both men had agreed that “Brazil’s problems should be addressed in a conventional way.”

The Brazilian negotiations, involving Latin America’s largest debtor, are nearing a critical juncture and are being watched closely to see if any cracks are developing in the Reagan Administration’s approach to the massive Third World debt.

The Administration has been pressing for a voluntary agreement acceptable to creditors that would maintain a flow of lending to the Third World and avoid severe repercussions in those nations’ economies. The “Baker plan,” offered by the Treasury secretary in 1985, was a method for providing new loans to about 15 major debtor countries in return for market-opening reforms in those countries.

However, the Baker plan has come under increasing criticism recently by lawmakers who argue that the U.S. government should move more openly to outright debt forgiveness or relief.

Brazilian officials, having had informal discussions on the debt, expect to begin formal negotiations with commercial banks later this month.

Adding to the confusion over the meeting with Baker, Brazil’s finance minister suggested that Baker supported Brazil’s plan to work out an agreement with commercial banks before attempting to negotiate with the International Monetary Fund, the multilateral institution responsible for imposing economic adjustment programs on debtor nations.

But senior Treasury officials, speaking on condition that they not be identified, disputed that point, contending that Baker merely said he would have no objection to any deal Brazil could work out independently with its creditors. Although the IMF is politically anathema in Brazil, commercial banks are unlikely to “reach an agreement without an IMF agreement in hand,” said Horst Schulman, president of the Institute for International Finance, a research organization that represents the views of a number of major banks.

Brazil has refused to pay interest on its debt since April, a move that prompted New York’s Citibank to toughen its own position in May by setting aside $3 billion in reserves to protect itself against potential losses. Other U.S. banks followed Citibank’s lead, putting the lenders in a better position to consider alternative strategies to negotiating with Third World debtors.

Fixed Rates Sought

Brazil’s original proposal “had all the markings of a trial balloon,” said William Cline, a senior economist at the Institute for International Economics and a specialist in Third World debt. “I don’t think it was carefully conceived, but the effect will be to soften up the banks in the negotiations ahead.”

Bresser Pereira said that in his negotiations with commercial banks, he will propose to “start with a deferment of payments of interests” in hopes of ultimately winning fixed rates of interest on his nation’s bank debt. For those who “voluntarily” accepted fixed-rate bonds, the finance minister said, Brazil would agree to pay a “kicker,” or extra payment, if its exports rise above certain levels.

The fate of the revised proposal, Bresser Pereira said, “depends on the will of the banks.” Acknowledging that Brazil’s original plan was unacceptable to its lenders, he said: “We accepted not to propose that. But there will be a large voluntary program. The banks can take bonds in as large a quantity as they like at a fixed rate of interest.”

‘No U.S. Aid’

A senior Treasury official said that Bresser Pereira “agreed that Brazil would address its debt negotiations in a conventional way on a mutually agreed basis with its lenders. They are not going to pursue a dictated, unilateral type of solution to their situation.”

The official, maintaining Treasury’s traditional hands-off approach to negotiations between Third World debtors and commercial banks, said the Administration could accept any “mutually acceptable arrangement” that might involve new types of marketable securities, debt-equity swaps, or other proposals that do not require direct U.S. government aid.

In contrast to the Administration position, many members of Congress, including Sen. Bill Bradley (D-N.J.) and Rep. Charles Schumer (D-N.Y.), have proposed some form of outright debt forgiveness for Latin American debtors to reduce their cost of servicing existing loans.