Brazil Insists It Will Stick With Bond Conversion Plan

Brazil intends to stick with a strategy for a comprehensive solution to its $113-billion debt when it begins talks with creditor banks later this month, Finance Minister Luiz Carlos Bresser Pereira said Thursday.

And despite a terse rebuff from U.S. Treasury Secretary James A. Baker III on Tuesday, the finance minister told Reuters in an interview that plans to convert half of Brazil’s foreign bank debt to bonds are still alive.

“Brazil continues to hold that the present approach of ‘muddling through’ is bad for both debtors and creditors,” he said.

Creditor banks, particularly in the United States, as well as many Brazilian business leaders and newspapers have reacted coolly to the plan, but Bresser Pereira insisted that it is viable.

“We think that sooner or later the banks will accept it as realistic. Even now their reaction is mixed,” he said.

The Brazilian minister’s statement came after he returned from Washington, where he held talks with Baker.

According to a Treasury Department statement issued after the meeting, Baker called Bresser Pereira’s original debt to bonds plan a “non-starter.”

This would have forced banks to accept discounted bonds and to write off some of their debts.

Bresser Pereira said he was disappointed with the Treasury Department statement on his bond scheme, which he said did not reflect his talks with Baker, and that the plan has not been dropped.

“We had a compromise. Baker accepted that Brazil could reach an agreement with banks without the IMF, and Brazil accepted that the bond scheme should be voluntary,” he said.

The Bresser Pereira plan involved swapping half of the country’s $68 billion in foreign bank debt for bonds that would then be sold to investors at a yet to be fixed discount. Repayment of the bonds would be over a 25- to 30-year period.

Brazilian debt is now selling for roughly 55% of its face value, so the plan would mean bank writeoffs of about $20 billion.

He said that, although the bonds would be sold at a discount, Brazil would make extra payments as its capacity to pay improves and that the effect will really be just a deferment of interest.

Brazil, the developing world’s largest debtor nation, has not paid interest on foreign bank debt for seven months, and arrears are projected to reach $4.2 billion this year if the moratorium is not ended.

Banks have urged Brazil to make a token interest payment to prevent a downgrading, but Bresser was emphatic. “There will be no token payment,” he said.

He returns to New York on Sept. 24 for talks with the finance ministers of Mexico and Argentina before meeting Brazil’s 14-bank advisory committee the next day.

The U.S. Comptroller of the Currency will meet Oct. 20 with banking regulators to decide whether to downgrade Brazil loans to value-impaired, which would require banks to set aside reserves to cover losses.