CONFIDENTIAL
5
ort has held up finalisation of the agreement with the Paris Club on the
rescheduling of principal due in 1987 Hl: the conditions of the rescheduling
inched Brazil reaching a financing agreement with commercial banks and the IMF MD
giving a positive appraisal of Brazil to the Paris Club on the basis of an Article
IV Fund Board discussion by 15 July. In June, when it was clear the latter
condition would not be met, the Paris Club extended this deadline to 15 September.
The Brazilian authorities for their part announced on 1 July that they would suspend
the $1.05 bn principal payments due to the Paris Club this year; the Paris Club on
21 July endorsed its earlier insistence on a full SBA as a condition for further
rescheduling. The question of new export credit cover must also be settled soon;
most countries at the moment are following the US lead in withholding new cover
(although the French are reported to be willing to offer some cover for their
proposed helicopter contract).
12 The full 1987-1991 macroeconomic plan was announced on 21 July but had already
been extensively leaked to the press. The targets include GDP growth of 5% in
1987, 6% in 1988 and 7% pa in 1989-91, with trade surpluses of $8.5 bn in 1987 and
$10 bn in 1988. Action is to be taken to cut the operational PSBR to 3.5% of GDP,
but, given the high rate of inflation in Hl, IMF Staff estimate that this could
still result in a nominal PSBR of 25-30% of GDP. Bresser has also outlined the
authorities' conditions for ending the moratorium on payment of interest on
commercial bank debt. These involve the refinancing of all the $4.3 bn of interest
due to the banks in 1987 and $3 bn of the interest due in 1988 at zero spreads, the
rescheduling of other debt on terms comparable to those agreed for Mexico, a cap on
interest rates beyond which payments due would be capitalised, the withdrawal of
about 500 smaller banks from negotiations through debt swaps or exit bonds, and the
conversion of interbank lines into longer-term finance. Advisory Committee banks,
who were presented with the Plan on 22 July, have reacted cautiously and formal
negotiations are not expected to begin until September. While the amounts of
financing involved are broadly as expected, banks are unwilling to take a view until
the IMF's assessment is known.
13 There are increasing signs that the Brazilian economy has been cooling, even
before the austerity package announced on 12 June. Both the falling volume of
consumer sales and the increase in exports of manufactured goods in May (up by 50%
compared with April) suggest that domestic demand is lessening, but the 26% rise in
the CPI in June suggests that the country is still far from having brought inflation
under control. The June austerity package introduced tighter monetary and fiscal
policy, a price freeze for up to 90 days and the abolition of the indexed wage
trigger. The daily devaluation of the exchange rate is to continue following a
larger devaluation of 8.7% against the dollar. It appears that the trade balance
has already begun to turn round, and exports have recovered: the May trade surplus
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