Brazil, which has been mending its tattered relations with the global financial community, took another important step yesterday by agreeing to make a $700 million interest payment to banks that will clear up the country's overdue obligations for 1988.
The move came as part of an accord in which Brazil's bank creditors pledged to lend the nation $5.8 billion toward a medium-term financial package at the same relatively favorable interest-rate terms that Mexico and some other debtor nations have received.
By bringing its payments for 1988 up to date, a move that came as a pleasant surprise to some bankers, Brazil provided fresh evidence that it is renouncing the confrontational strategy it adopted a year ago. The nation's new finance minister, Mailson Ferreira da Nobrega, has said that Brazil was hurt financially by its Feb. 20, 1987, moratorium on repaying interest on the $67 billion it owes banks.
As the developing world's biggest debtor nation, Brazil's actions are especially significant because its attitudes toward creditors influence other Third World borrowers.
Argentine officials, for example, have cited the Brazilian example to explain why Argentina shouldn't suspend interest payments on its debt despite a severe cash shortage. Leaders of the Buenos Aires government have noted that Nobrega and other Brazilian officials admit the moratorium cost Brazil more than it gained, in part because investors proved reluctant to put money into the nation's economy.
"It was a milestone in the debt crisis when Brazil went into the moratorium," said one senior U.S. banker, "and now that Brazil has come out of the moratorium quicker than people imagined, that's a milestone, too."
Yesterday's announcement was issued by Fernando Milliet, president of Brazil's central bank, and William R. Rhodes, a senior vice president of Citibank who chairs a committee of bankers representing Brazil's commercial bank creditors.
The announcement came four weeks after Brazil made an initial payment of $350 million toward its 1988 obligations, which covered about 37 percent of what the nation owed in interest for January. The $700 million additional payment announced yesterday will cover interest Brazil owes for January and February. Under Brazil's debt agreements, interest payments for January tend to be bigger than in other months.
Another important part of yesterday's announcement was disclosure of a preliminary agreement between the banks and Brazil on the basic elements of a medium-term financing package. Brazil has insisted that it can't resume paying interest unless progress is made toward ensuring that it will have sufficient capital to grow in the medium term.
Under the pact, the banks are agreeing to provide $5.8 billion in new money to cover Brazil's financing needs for 1988 and 1989, as well as for last year when the country went without an accord with its banks because of the moratorium.
The interest rate on the loan will be a floating rate thirteen-sixteenths of a percentage point above the benchmark London Interbank Offered Rate, a margin significantly below the 2 percentage-points-above-LIBOR that Brazil now pays on much of its debt. The thirteen-sixteenths margin was first given to Mexico and then to some other debtors.