Brazil may get a break on debt of $14 billion
IMF could OK delay to avoid a default
BY JULIE ZIEGLER
WASHINGTON - The International Monetary Fund may permit Brazil to delay repayment of about $14 billion in loans as South America's largest country tries to avoid defaulting on its debt.
Treasury Secretary Paul O'Neill said Thursday that the Bush administration favors more loans for Brazil and Uruguay, which is also facing an economic crisis. ''I continue to favor support for Brazil and other nations that take appropriate policy steps to build sound, sustainable and growing economies,'' said O'Neill, who leaves Washington Sunday for a fact-finding mission to the region.
Brazilian bonds rose and the currency strengthened for the first
time in 10 days, jumping 10.9 percent after the IMF said it's considering
extending a loan agreement
with Brazil and a spokesman said the fund is talking with Brazilian officials on an ``active, urgent basis.''
A financial crisis is spreading across the economies in South
America. Argentina has defaulted on its $95 billion debt to private creditors,
frozen a large chunk of the
country's savings in bank accounts and watched as the unemployment rate rose to an official 22 percent. Uruguay closed banks this week to stop investors from draining cash. And now, Brazil's burgeoning gross debt stands at around $330 billion, about 80 percent of the country's gross domestic product.
The IMF talks may allow Brazil to postpone repaying the fund
about $11 billion it owes in 2003 and give the central bank more time to
stabilize the currency, which has
fallen 23 percent in the last three months.
''The most likely scenario is there's no fresh cash brought in
but instead Brazil will be able to delay repayment,'' said Christian Stracke,
head of emerging markets
research at CreditSights Inc., a credit research firm in New York.
Brazil has already borrowed all but $1 billion of a $15 billion loan agreement made last September, and plans to borrow the rest before the end of the year.
IMF aid may only be a short-term fix for Brazil, which has seen
its debt triple since 1995 as President Fernando Henrique Cardoso assumed
old government debts and
borrowed to close spending gaps.
Much of the regional turmoil is caused by investors' concerns
that the two leading candidates in Brazil's Oct. 6 presidential elections
are leftists who vow to overhaul the nation's U.S.-backed pro-market economic
policies. The IMF may insist that both candidates reverse course and sign
a preelection pledge to maintain Brazil's broad
open-market reforms as a condition for any new loans.
IMF aid ''doesn't help in the long term,'' said Oswaldo Sandoval,
who manages about $50 million of emerging market stocks and bonds for Explorador
There are other signs of difficulties ahead.
The credit rating company Fitch Ratings on Thursday said it may cut Brazil's local currency debt rating because of the currency's decline this year. Fitch, in a statement, said there's ''little likelihood'' investor sentiment will improve soon.
Citigroup Chairman Sanford Weill is meeting regularly with Robert
Rubin and other top officials to ensure the bank limits its risk in Brazil
after losing $2.2 billion in
neighboring Argentina, Chief Financial Officer Todd Thomson said.
Nevertheless, O'Neill said Brazil ''will succeed'' with the right policies.
''The economic team in Brazil has done a remarkable job of maintaining sound fiscal and monetary policies,'' O'Neill said.
His remarks contrast with comments Sunday, when he ruffled feathers
by saying Latin American countries need to enact responsible economic policies
international assistance ``doesn't just go out of the country to Swiss bank accounts.''
O'Neill's statement Thursday ''improved sentiment that there's
finally light at the end of the tunnel, and not only for Brazil,'' said
Alexandre Vasarhelyi, head of foreign
exchange trading for the Sao Paulo unit of ING Bank NV.
Going forward, Brazil needs to convince investors that no matter
who is in charge of the next government, it will control inflation and
cut spending enough to reduce a
budget deficit that's expected to reach 4.55 percent of gross domestic product this year, economists said.
And unless interest rates for government borrowing, now above
20 percent, fall and the economy recovers from its first recession in three
years, Brazil may not be able
to make its payments without negotiating new terms with creditors.
José Luis Espert, an independent economist in Buenos Aires, sees a debt moratorium in Brazil as inevitable.
''I think Brazil is on the path to restructure it's debt, the question is whether it will be voluntary or through default,'' Espert said.
He added, ``Brazil's problems are the region's, where the complications just get worse.''
The Herald's Washington bureau and staff writer Jane Bussey contributed to this report.