WITH THE stock market's troubles, the dilemma of the Brazilian bank debts becomes more difficult. It's been eight months since the Brazilians suspended payments on their debts, now more than $70 billion. About a third of it is owed to American banks, and under American rules the regulators now have to decide whether to require the banks to start writing it off.
To write it off reduces a bank's capital. Most of the major lenders to Brazil set up special reserves last spring against that possibility, and until last week, the regulators could have ordered them to write off 10 percent without any great concern. But with the whole financial structure under great strain, anything that constrains liquidity and the banking system's ability to keep lending normally is going to require very careful thought. There is also a risk that, as write-offs begin, some bank might try to recoup its loss by seizing Brazilian property -- a ship's cargo, perhaps, or a plane. In present conditions, any disruption of trade would be harmful.
But the American regulators can't afford simply to ignore Brazil's refusal to pay. They do not wish to give the impression, either to borrowers or to banks, that there are no consequences of breaking commitments.
Brazil wants concessions on its debts, but resents the conditions that the lending countries generally impose -- the most important of which is economic reform. Debt concessions are a form of foreign aid, and the donors are entitled to ask the recipients to respond by doing what they can to let their own economies work more efficiently.
The Brazilian government, unfortunately, seems to regard this kind of condition as an infringement of the country's sovereignty and an assault on its national pride. President Jose Sarney has been doing a spectacularly unsteady job of managing the economy, and his authority is fading. The Brazilian Congress is meanwhile in the process of writing a constitution, and it's unclear how long President Sarney's term will last or even whether the country will continue to have presidential government. In the midst of this confusion it is difficult for Brazil to make policy on an issue as heavily freighted with emotion as the bank debts.
The regulators are reportedly trying to work out a temporary solution in which everyone gives a little -- banks, Brazil, even the regulators themselves -- in order to slide along for a while with no collisions and no write-offs. It won't solve anything. But under the circumstances perhaps that's the best solution -- if it can be managed.