Brazilian President Dilma Rousseff is mobilizing her cabinet to persuade the nation’s highest court to delay ruling on a case that could cost banks $65 billion and shrink credit, according to two government officials briefed on the matter.
The court’s ruling on lawsuits brought by depositors could require banks such as Caixa Economica Federal and Banco do Brasil SA to reimburse clients for losses stemming from government policies dating back more than 20 years. Given the potential impact on lenders, Rousseff is seeking to delay the ruling as much as possible, said one of the officials, who asked not to be identified because the talks aren’t public.
Economists are lowering 2014 growth estimates for the country’s $2.25 trillion economy as inflation remains above the central bank’s target and the government battles a widening budget gap. Latin America’s biggest economy would be shaken and credit might contract by as much as 1 trillion reais ($437 billion) if the nation’s high court rules against banks this week on the lawsuits, former Finance Minister Marcilio Marques Moreira said.
“An unfavorable ruling could ruin our economy as it would cost between 100 billion reais and 150 billion reais in capital to banks,” Moreira, who was Brazil’s finance minister from 1991 to 1992, when the country was fighting hyperinflation, said in an interview from Rio de Janeiro. “A ruling against banks would create legal and financial chaos.”
Brazil’s Supreme Court said earlier this month it would start ruling Nov. 27 on suits related to losses from government plans adopted to stem hyperinflation from 1986 to 1994, when the nation froze bank deposits, introduced new currency and reduced returns on savings accounts.
The central bank estimated lenders would have to pay 149 billion reais to depositors if they lose the court cases. Valor Economico newspaper reported yesterday that the losses could reach 600 billion reais, citing an estimate by consultant firm LCA Consultores Ltda.
The large estimates reported by local media “appear unrealistic,” analysts at JPMorgan Chase & Co. including Natalia Corfield wrote in a note to clients yesterday.
The estimate of 600 billion reais “would deplete the equity value of the largest banks and the 150 billion reais would correspond to roughly half of it,” the analysts wrote, adding that the total equity of Brazil’s five largest lenders was almost 302 billion reais as of the third quarter.
Brazilian banks, led by federally controlled Banco do Brasil, declined yesterday in Sao Paulo trading on concern the ruling would reduce their capital. Banco do Brasil, based in Brasilia, dropped 2.6 percent to 24 reais, the lowest level since Sept. 13. It gained 2.3 percent at 1:50 p.m. in Sao Paulo. Itau Unibanco Holding SA Latin America’s largest bank by market value, slumped 1.5 percent yesterday and advanced 1.2 percent today.
“I believe there will be a satisfactory solution to the question that won’t harm the financial sector, will not shake credit and will accommodate all interests,” Brazil Finance Minister Guido Mantega told reporters in Brasilia.
Lenders complied with the law that was in effect at the time and shouldn’t be penalized, Brazil’s bank association, Febraban, said in an e-mailed statement. An official at Banco do Brasil declined to comment on the Supreme Court cases.
The Brazilian Institute of Consumer Defense, which submitted a brief in support of the claims against the nation’s banks, said money was taken from depositors as a result of the government’s actions and lenders benefited from those moves, according to a statement on its website.
“Banks didn’t profit from the economic plans” of the government, said Moreira, who now runs research firm Conjuntura e Contexto Consultoria in Rio de Janeiro.