IMF could OK delay to avoid a default

  BY JULIE ZIEGLER
  Bloomberg News

  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 Capital
  Management.

  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 so that
  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.