Brazil Says It Will Make Interest Payment on Debt

The government of Brazil, saying “the time has come to normalize our relations” with creditors, agreed Monday to make a $350-million interest payment on its debt and to start a “process of rapprochement” with the International Monetary Fund.

The actions were welcomed by U.S. officials and banks as a significant step by Brazil toward renouncing the debt-moratorium strategy it adopted a year ago.

In an unusual statement issued by the Finance Ministry, Brazil acknowledged that the moratorium was causing the nation to suffer financially, in part because of the loss of investment from abroad. The moratorium, announced by President Jose Sarney last February, involved the suspension of repayment on much of Brazil’s $110-billion debt.

Just as the moratorium aroused fears of a breakdown between debtor nations and banks, Monday’s development should ease worry somewhat about the possibility of a massive default that could wreck the financial system, U.S. officials and bankers said.

Many banks reacted to the moratorium by bolstering their reserves for losses on Third World loans. But now, the largest developing debtor nation has admitted that withholding payment on its debt cost more money than it gained.

“This will have an effect on how debtor nations look at the debt issue,” one senior U.S. banker said. “They will see the lesson.”

The Brazilian move comes about a month after another development that experts viewed as helpful in defusing the debt crisis--Mexico’s plan to reduce its bank debt by swapping lower amounts of new bonds. But another big debtor, Argentina, is in severe financial difficulty and may have no choice but to suspend repayment this year, some analysts believe.

The Brazilian Finance Ministry statement said that the country was incurring a “high financial cost” because of having to conduct long, acrimonious negotiations with its creditors. “While the negotiations continue, Brazil does not benefit from the reduction in interest rates which a new (financial arrangement) would bring,” the statement said. “At the same time, Brazilian banks abroad pay higher rates on their short-term credit lines” because of the country’s damaged reputation.

Moreover, the situation “deprives the country of a broader flow of investments and additional resources from international financial organizations” such as the World Bank, the statement said.

Officials and bankers cautioned that Brazil has only taken a step toward restoring its financial health. Brazil and its banks must still reach agreement on a way to restructure the nation’s debt over the medium term.

Moreover, Brazil must reach an agreement with the IMF, which provides loans to financially strapped countries on condition that they revamp their economic policies.

Finance Minister Mailson Ferreira da Nobrega has been talking recently of reaching an accord with the IMF, and Monday’s statement said that talks were slated for the middle of this month between Brazilian officials and IMF technicians. This “rapprochement . . . can prepare the way for a possible agreement with the (IMF) to be negotiated later,” the statement said.

But Monday’s statement outlined several measures Brazil plans to take to move toward those goals.

In a move the Finance Ministry described as “a sign of determination and confidence,” the government said it would pay $350 million to bank creditors immediately. That payment would cover only about 37% of what Brazil owed banks for January.