[PEN-L:29902] spinning brazil

["Ian Murray" <seamus2001@xxxxxxxxx>]

Banks Vow To Maintain Brazil Credit
Pledge Gives a Boost To IMF Bailout Effort

By Paul Blustein
Washington Post Staff Writer
Tuesday, August 27, 2002; Page E01

The troubled international initiative to rescue the Brazilian economy got a shot in the
arm yesterday as executives of 16 major banks, meeting in the presence of U.S. regulators
and Brazilian officials, issued a statement voicing their intention to maintain credit
lines to Brazil.

The meeting at the Federal Reserve Bank of New York marked an important effort to shore up
the International Monetary Fund's $30 billion bailout of Brazil by persuading banks to
stop pulling money out of the country. Despite the announcement on Aug. 7 that Brazil
would receive the largest loan in IMF history, an outflow of funds from the country has
continued, threatening to undermine the U.S.-backed rescue, which is aimed at keeping
South America's biggest economy from collapse. One of the problems has been the canceling
of credit lines by foreign banks.

Initially at least, the meeting and the statement issued afterward appeared to produce the
desired effect. Brazilian financial markets have rallied in recent days in part because of
the disclosure that the meeting would be held, and yesterday the country's main stock
index jumped 4.35 percent.

The Brazilian real, which has lost about one-quarter of its value against the U.S. dollar
this year, edged 0.6 percent higher, and a benchmark government bond posted modest gains
to close at about 59.6 cents per dollar of face value, close to the 61-cent level it
reached right after the IMF rescue was unveiled.

Summoning bankers to meetings at central banks for a bit of "moral suasion" is a rare but
hardly unprecedented tactic when IMF-led rescues are faltering. The tactic was used to
good effect to keep banks from cutting credit lines to South Korea in 1997 and to Brazil
in 1999.

The general idea is that while each bank may have an individual interest in pulling its
money out from a crisis-stricken country, collectively they have an interest in avoiding a
debt default that could cost them billions of dollars and drag down other economies as
well. So their regulators -- central bank officials -- can help by steering the banks
toward joint pledges to keep their credit lines open, without overtly intervening in the
decisions of private financial institutions.

Fed officials and bankers were at pains to dismiss any suggestion that yesterday's meeting
involved the sort of arm twisting that went on in the earlier cases. The vast majority of
talking at the meeting, which began at 10 a.m. and ended shortly before 1 p.m., involved
presentations on Brazil's economic and political situation by Arminio Fraga, the president
of Brazil's central bank, and Pedro Malan, the country's finance minister.

"Basically, there was no pressure from the official sector," William R. Rhodes,
Citigroup's vice chairman, said in a phone interview. "This was voluntary. It was
basically a Brazilian operation, and the reason they held it at the Fed was that they
wanted a neutral site."

Peter Bakstansky, spokesman for the New York Fed -- the most important of the Federal
Reserve System's 12 reserve banks -- agreed. "We really just hosted," he said.

But Fed officials have privately acknowledged in the past that when such meetings are held
at central bank offices, they send a clear but unstated signal to the bankers present.
William J. McDonough, the New York Fed president, opened the meeting with some remarks,
and Terrence J. Checki, an executive vice president of the reserve bank, remained in the
meeting.

"We always say that the banks make up their own minds," said Edwin Truman, who served more
than two decades as the Fed's top international staffer before taking a similar post at
the Treasury during the Clinton administration. But the implicit message to the banks in
such meetings, he said, is: "If you don't go along with this, it will be unpleasant for
all of us."

"It's an important public policy issue," Truman added. "Important enough so that the New
York Fed -- or the Federal Reserve, since I'm sure this was cleared with Greenspan -- was
willing to use its good offices," he said, referring to Fed Chairman Alan Greenspan. And
although the U.S. Treasury, which declined comment, wasn't involved in the meeting, "I
would assume that the Treasury was very closely following the outcome of this meeting and
would be very disappointed if it weren't successful."

Rhodes maintained, however, that nobody had to be coerced to sign yesterday's statement,
in which the banks "expressed their intention to sustain their general level of business
in the country including trade lines." A major reason for the banks' positive attitude, he
said, was the endorsement of the IMF program by all the candidates in Brazil's October
presidential election.

Meeting with reporters after the meeting, Fraga declared the statement to be "the
strongest possible signal the banks could send."

Besides Citigroup, banks represented at the meeting included J.P. Morgan Chase & Co., Bank
of America Corp., Deutsche Bank AG, the Bank of Tokyo-Mitsubishi Ltd., Standard Chartered
Group PLC and Banco Santander Central Hispano SA. Brazilian officials plan a "road show"
in global financial centers to present their case to other banks.