U.S. banks are intensifying their talks with administration officials and multilateral lending agencies on a potential multibillion-dollar credit facility for Brazil.
U.S. bankers declined to comment, except to confirm that they met last week with International Monetary Fund officials to discuss Brazil and its increasingly troubled economic prospects.
Banking sources in Buenos Aires and Sao Paulo said U.S. banks are urging the IMF and World Bank to put in place a standby credit facility for Brazil in which they would participate. The facility would be made available to the Brazilian central bank in the event of a liquidity shortage or to prop up the nation's currency.
The sources added that banks are privately urging the Federal Reserve Board to cut U.S. interest rates, which could in turn ease the pressure on Brazil and other countries. Annual interest rates in Brazil are around 50%, raising the specters of recession and credit crunch.
"New York bankers are a bit panicked at the moment," said Christopher Ecclestone, a director at the brokerage firm Interacciones Global Inc., Buenos Aires.
"They got creamed in Russia and will get creamed again in Brazil if (Fed Chairman Alan) Greenspan doesn't come to the party."
Among those known to be represented in the talks were Citicorp, Chase Manhattan Corp., J.P. Morgan & Co., Goldman Sachs & Co., and Merrill Lynch & Co.
The standby-facility discussion followed a move early last week by the International Monetary Fund and InterAmerican Development Bank to put together a $5 billion package for Argentina in the event it has problems raising funds on international markets.
Concern among U.S. bankers about Brazil and other Latin American countries has risen sharply in recent weeks. The collapse of Russia's financial markets spurred outflows of foreign and local capital from these and other emerging economies.
The concerns are heightened by the refusal of the U.S. Congress to approve $18 billion in funding for the International Monetary Fund that could aid in any Brazilian bailout.
Analysts pointed out that U.S. banks are far more vulnerable to Latin America than to Russia. According to government data, U.S. banks had $76.5 billion in cross-border exposure to Latin America as of March 31, including $27.2 billion to Brazil. That was well above the Russia figure of $6.8 billion.
The exposure is concentrated in a handful of large U.S. banks whose capital could quickly erode if sizable writeoffs were required. That, in turn, could tighten domestic lending, perhaps causing a U.S. recession.
Informed sources estimated that the Brazilian central bank has spent more than $20 billion supporting its currency, the real, over the last three weeks. Hard-currency reserves fell to between $45 billion and $47 billion from around $70 billion.
The sources cited concern that billions of dollars of foreign investments could leave the country between now and Oct. 4, the Brazilian presidential election day.
That, they added, could make it virtually impossible for Brazil to reimburse or roll over more than $140 billion in private-sector and $80 billion in public-sector borrowings, much of it short-term. Any default by Brazilian borrowers could cause a major headache for U.S. banks.
