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Brazil Starts Controversial Debt-Conversion Plan

March 30, 1988

RIO DE JANEIRO, Brazil (AP) _ The Third World’s most indebted nation began an experimental program Tuesday to swap a small portion of its $112.7 billion foreign debt for equity interests in Brazilian enterprises.

The Rio de Janeiro Stock Exchange, under the supervision of the Central Bank, began auctioning $150 million in debt owed to foreign banks, which bid for debt credits by offering discounts on their unpaid loans. The credits went to the bidder willing to take the biggest discount.

The credits, which are denominated in the Brazilian cruzado, can be traded for interest in Brazilian companies or development projects, under rules determined by the Central Bank.

In the first step of the auction, credits for $75 million in debts were auctioned to foreign banks at discounts of 26.5 percent and 27 percent. Thus, for every $100 in debt exchanged, creditors are entitled to approximately $73 worth of equity in a Brazilian property.

The credits for the first $75 million can be swapped for interests in Brazilian companies, both private and government owned.

An additional $75 million in debt was to be auctioned later Tuesday for investments in government-approved development projects in Brazil’s poorer regions, such as the Amazon basin, the drought-punished northeastern region and the east-central state of Minas Gerais.

The Central Bank is considering authorizing auctions of $150 million every month throughout the year.

The actual amount involved in Tuesday’s auction was small, but the principle was seen by government officials as a possible solution to the problem of hundreds of billions of dollars of uncollected foreign debt worldwide.

Brazil’s debt includes $68 billion owed to approximately 750 American, Canadian, European and Japanese banks. The biggest individual creditors are U.S. banking giants such as Citibank, Morgan Guaranty Trust, Chase Manhattan, Manufacturers Hanover and Bank of America.

Brazil has not paid back any of its debt prinicpal since 1982. A year ago, it stopped paying interest as well, although it resumed such payments at least temporarily this year.

″The debt conversion will turn unpaid debt into new wealth inside Brazil,″ said Sergio Barcellos, the president of the Rio Stock Exchange. ″It is an excellent idea.″

″With debt-for-equity conversion, the creditors get something and have a chance to turn their Brazilian holdings into local profits,″ Barcellos said. ″Otherwise they might have to wait 20 to 30 years to get their money back, if at all.″

Rules for the credit swap were complicated.

A bank could not simply swap its debt for stock, say, in Petrobras, the state-run oil company, or Varig airlines, which is privately controlled. But it could trade its debt for shares in a Brazilian mututal fund that owns shares in Petrobras and Varig.

However, under existing rules governing foreign participation in the Brazilian stock market, such mutual fund shares must remain in Brazil for 12 years.

In the case of credits for development projects, a creditor could transform part of what Brazil owes into full or partial ownership of a cattle ranch in the Amazon or an irrigated fruit farm in the Northeast. The foreign creditor is free to choose such investment ventures, but the government must approve them.

Some leftists criticized the swap plan on grounds it would ″denationalize″ Brazil’s economy and let powerful foreign interests take over struggling Brazilian firms.

But government officials have noted that under current economic conditions, investment capital has stopped flowing into Brazil. They argue the plan will boost the economy and create jobs.

Meanwhile, Brazil also is seeking more conventional solutions to its debt problem. Earlier this month, the government and private creditors agreed in principle on a 20-year rescheduling for repayment of much of the debt, and officials say the country also will sign an agreement with the International Monetary Fund.

Overseas banks say a prime consideration for future loans to Brazil is IMF approval of Brazilian financial policy.