Brazil Aims for Better Terms With Creditors

Brazil is backing down from the debt moratorium that it declared nearly a year ago. The costs were too high, it seems, and the benefits too few.

In a conciliatory gesture to creditors, the government set no conditions earlier this week when it announced a payment of $350 million in interest owed to private foreign banks.

“It is time to return to normal,” the Finance Ministry said in a statement and went on to express the hope that “creditors will respond in a positive and constructive way.” Brazil will make new interest payments as negotiations with a committee of creditor banks advance toward a refinancing agreement, the statement said.

President Jose Sarney announced last Feb. 20 that Brazil was suspending interest payments on about $70 billion in loans from private foreign banks. Those medium- and long-term loans represent the bulk of Brazil’s total foreign debt, which is now estimated at $117 billion, the largest of any developing country, .

Not Tied to Bridge Loan

Under a preliminary agreement with the bank committee in November, Brazil paid about $500 million and the banks supplied a bridge loan of $1 billion to cover $1.5 billion in interest due during the last quarter of 1987.

The $350-million payment by Brazil this week, covering 37% of the interest due in January, was not tied to any matching bridge loan or other conditions.

Negotiations for refinancing overdue 1987 interest and payments due this year will continue.

Government and non-government economists have estimated in recent days that Brazil lost $700 million to $1 billion in 1987 because of the moratorium. For example, after the moratorium went into effect, commercial banks began charging Brazil higher interest rates on $15 billion in short-term credits used to finance trade.

To protect its foreign currency reserves from possible retaliatory action, Brazil transferred them from interest-bearing instruments to Swiss accounts without interest.

And while Brazil continued payments on low-interest loans from foreign governments and international lending institutions, interest on the unpaid commercial loans continued to compound at higher rates.

Brazil was accumulating debt at rates of nearly 2% over the London interbank rate (Libor), while Mexico, Argentina and other countries paid at newly negotiated commercial rates of less than 1% over Libor.

Brazil’s main reason for declaring the moratorium was the depletion of its foreign reserves, which had dropped by nearly half in two years. But despite the moratorium and a record trade surplus of $11.2 billion in 1987, the reserves increased only slightly, to an estimated $4.4 billion from $3.9 billion a year ago.