Alan Riding, “International Strategy; Brazil’s Reversal of Debt Strategy”. New York Times, February 22, 1988.

Summary by Alison Cozby

Main Point:

In dealing with its $113 billion in foreign debt, the Brazilian government thought that a moratorium would help to extract better deals from creditors, a risky strategy. It seems they overestimated their bargaining power, and will have to return to a commercial restructuring of debt.

Summary:

A slump in hard currency reserves forced Brazil to suspend payments on its $113 billion foreign debt last February. Trying to obtain a better deal from creditors, much like other Latin American debtor nations since the beginning of the debt crisis in 1982 with Mexico, Brazil took a daring gamble in its negotiations. This was the focus of the entire international financial community as any concessions made to the third world’s largest debtor nation would benefit smaller debtors as well. Only a year later Brazil is reverting to a domestic austerity program with the International Monetary Fund.

Finance Minister’s View

What went wrong? Why change strategies and go to the IMF? The new Brazilian Finance Minister, Nobrega, explained that he though the moratorium was a mistake because it created uncertainty, discouraged investment and affected credit flows from abroad.

Wide Reaction of Relief

The Regan Administration, the I.M.F., and the World Bank praised Brazil in rejoining Mexico, Argentina, Peru and other debtors in what has so far proved to be a futile attempt to rebuild their economies while keeping up their payments. Meanwhile, the only significant change that has occurred so far is that American and European banks have built up their reserves against losses.

Lending Focus Has Shifted

The 1970’s lending focus on Latin America has switched to Asia. Brazil overestimated its bargaining power by suspending the $70 billion it owes to foreign commercial banks, who in turn simply reduced trade credit lines and delayed other loans. Some say that during the moratorium Brazil’s loss was at $1 billion. The moratorium timing was also faulty as there was three-digit inflation undermining confidence in the Brazilian economy and government, and little domestic support for it. Also, there was no move by President Sarney to mobilize other Latin American countries for the same cause.

Regional Default Avoided

Foreign Bankers knew that the regional debt was at $390 billion and worked hard to see that the entire area did not default together. The debt cycles ran separately.

1984- Argentina challenged its creditors and I.M.F., Brazil and Mexico believed their crisis were easing and discouraged Argentina from defaulting.

1985- Peru limited its debt payments to 10 % of its export earnings, and was not backed by other debtors.

1986- Mexico’s economy suffering from oil price slump, and came close to suspending payments on $109 billion in debt, but Brazil and Argentina did not support.

1987- Brazil suspended payments, but Mexico and Argentina just reached new agreements with creditors and preferred to watch Brazil’s situation, not support.

Skillful Bank Maneuvering

Foreign banks skillfully exploit debtor nations so that they would not act collectively. However, the fear of a joint moratorium lingers as debtor nations regard their debt burdens as the main cause of economic stagnation. For the first time since 1982, Brazil, Mexico and Argentina all suffer simultaneously from high inflation, minimal growth, rising unemployment and weak governments. Brazil alone suffers the economic consequences for a moratorium, but all together they are paying a high price for keeping up their debt payments.