TNAG-1640-FCO40-2287-Economic-situation-in-Hong-Kong-1987 — Page 58

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INTERNATIONAL DEBT REPORT

International Financial Scene

CONFIDENTIAL

1 On 16 June National Westminster Bank announced that it would be increasing

country debt provisions by £466 mn for the year to December 1987, bringing the level of provisions up to around 29% of the bank's exposure to a sample of 35 developing countries. On 7 July Midland Bank announced an increase in country debt provisions of £916 mn, bringing total provisions to 27% of exposure to its sample of developing

countries. In addition, Midland Bank announced the sales of its Scottish, Northern

Irish and Irish subsidiaries to National Australia Bank, and its long-awaited rights

issue, so as to strengthen its capital base. The increases in provisions take further the trends of the last few years, but represent a significant increase in

the speed at which provisions have been built up. As with the earlier loss reserve

announcements of the US banks, markets reacted positively to the announcements by

the British banks, taking the extent of the provisions as an indication of the

strength of the British banks in being able to take such moves. But unlike the earlier Citicorp announcement that it would use its loan loss reserves to cover losses on future sales in the secondary market and in debt/equity swaps, no such intention has been stated by the British banks.

2 Meanwhile, Brazil, whose actions earlier in the year were at least partly responsible for the increases in reserves/provisions by major US and UK banks, seems

to be gradually edging back from its earlier confrontational stance. An Article IV mission has been in Brazil assessing the austerity programme introduced in June, and the authorities are clearly seeking some form of endorsement. The Brazilian

external position seems to have turned round as the economy cools, with trade surpluses for both May and June back around the $1 bn level which characterised the

two years up to last summer, and which puts the country on course to meet its

$8 1/2 bn target for the year. However, the country still has much to do before

its overall performance is back even to that of the early days of the cruzado plan: inflation in June, for instance, was 26%. And the confrontational stance has not

entirely disappeared: on 1 July Brazil suspended payments on principal to the Paris

Club for the rest of the year, and the conditions set out by the authorities for an

end to the interest payments' moratorium with the commercial banks would be quite unprecedented, even if they were to be accompanied (which at present seems far from

certain) by a full IMF programme.