East West Debt, solving defaulted trade and bank debt

East-West Debt oct. 2002 news, update : BRAZIL

Brazil. The World Bank approved three loans, totaling $1 billion, to support Brazil's education, energy and financial sectors:

• $160 million loan for education with a repayment period of 12 years, including five years of grace, and will be disbursed over a period of four and a half years;
• $400 million loan for a financial sector reform with the repayment of principal after ten years;
• $450 million loan for the energy sector reform with the repayment of principal after ten years.

The Brazilian government reacted to the economic shocks in 2001 with an appropriate mix of monetary and fiscal actions, which allowed Brazil to reach 3.7% of GDP growth in 2001. This was well over the fiscal targets.

The World Bank is ready to continue supporting Brazil's policies and could recommend to its Board of Directors an increase in the lending program by up to $2 billion above the current level. This could raise the Bank's lending commitment to Brazil to $4.5 billion by December 2003.
The World Bank's assistance is part of a broader international support package undertaken in cooperation with the International Monetary Fund, the Inter-American Development Bank, and other partners.
In the first half of 2002, the World Bank was supporting 57 active projects in Brazil, totaling $5.7 billion. The International Finance Corporation (IFC) approved nine private sector projects between July 2001 and April 2002, totaling $850 million, and the Multilateral Investment Guarantee Agency (MIGA) insured eight projects for a total of $470 million.

Brazil's central bank is planning to lend money to the struggling Brazilian companies in the coming months. In addition, funds from the Inter- American Development Bank and the World Bank will be used to offer export financing through the BNDES which is the state development bank. The initiative of the banks is highly welcome for Brazilian companies because of their rising demand for dollars to service foreign debt obligations. It is most certainly welcome in the situation where foreign banks are not expected to extend significant loans to Brazilian companies before the election held in October this year.

Extending commercial export credits involves relatively low risk. In exchange for the loans, the government will obtain companies' assets as a guarantee and, despite the economic downturn, most exporters have a healthy profit margin and strong international competitiveness. Commercial lines of credit also carry less risk of being abused by speculators than direct cash injections into the currency market.
As a consequence, the central bank's proposal to extend commercial credit lines will allow to reduce pressure on the national currency and will prevent delays in much-needed export revenues. On the other hand, the central bank needs to be careful enough not to strengthen the currency too significantly. A strong dollar actually helps to prevent capital flight and further stimulates exports.

The IMF has decided to grant Brazil a $30 billion loan. Some 80 per cent of the loan will be paid in 2003 and is, dependent on budgets remaining, controlled and tight. Under the agreement with the IMF, Brazil has committed to maintaining a budget surplus of 3.75% of gross domestic product. If a new government elected in October embarks on wasteful and extravagant spending, the money will not flow. The loan gives the country a chance to restore confidence and to reduce the government's solvency problems.

The IMF decision gives Brazil an important boost, providing the central bank with a total additional $16 billion in international reserves to defend its unstable currency. Assuming private capital flight and a current account deficit of $1 billion per month each, as well as $2 billion in corporate foreign debt obligations per month, Brazil will face a total balance of payments gap of $14 billion during October. This is covered by the $16 billion in additional funds available to the central bank under the IMF loan agreement.
The loan is hoped to persuade foreign investors to ease their restrictive credit policies that have forced Brazilian companies to buy dollars to pay off foreign debt obligations. It should also restore Brazilians' confidence in their currency, which will prevent them from transferring savings to foreign bank accounts.

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