Banks Expected to Take Writedown on Brazil Loans

Federal regulators will soon require banks to set aside additional millions of dollars to cover potential losses for outstanding loans to Brazil, bankers said Monday, though the size of the increase and its effect on bank earnings remains unclear.

The development comes as a group of 21 banks continues talks with Brazilian officials in New York to negotiate payment of an estimated $8 billion in interest arrears on Brazil’s foreign debt. On Friday, Brazil paid $350 million in back interest to foreign banks--its first large payment since June, 1989.

Bankers say they’re making progress in talks on the outstanding interest, although formal negotiations haven’t begun on the principal owed private banks, estimated at $45 billion to $60 billion.

Bankers and industry analysts declined to speculate how the interest payments will affect the decision of the Interagency Country Exposure Review Committee, which is expected to require banks to write down a large percentage of their outstanding debt to Brazil.

The committee is composed of members of the Federal Reserve Board, the Office of the Controller of the Currency and the Federal Deposit Insurance Corp. It usually does not announce decisions, but bankers say notice could come within a week.

A writedown is the process in which loans are reduced in value and banks are required to boost reserves to cover a potential loss. If banks lack sufficient reserves, they would must dip into their earnings to cover the potential losses, which hurts profits.

It differs from a loan writeoff, a more severe step in which a loan is classified as worthless and written off as bad debt. Reserves set aside for potential losses are spent to cover that debt.

One banker, who spoke on condition of anonymity, said the panel could require writedowns ranging from 15% to 30% of the original loan.

The committee bases its loan writedown decisions on a judgment of a country’s ability or willingness to repay the original amount, bankers say.