Brazil's Senate has approved issuing $7 billion worth of government bonds to cover two years' worth of unpaid interest due foreign banks.

William Rhodes, vice chairman of Citicorp and head of the Brazilian bank advisory committee, said the move this week signified a "positive event for international creditors."

Some bankers and analysts recently expressed doubt that the Brazilian Senate would move ahead to approve the deal after Brazilian vice president Itamar Franco replaced President Fernando Collor de Mello, who has been formally accused of bribery and corruption.

Seen as Positive Sign

But the Senate approval, Mr. Rhodes said, "sends a firm signal to the international financial community that the new administration and Brazilian Congress are moving ahead with implementing a debt agreement."

The Citicorp chairman said he expected the Senate to approve within weeks a broader agreement reached in September and covering some $44 billion in medium- and long-term foreign commercial bank loans to Brazil.

He added that the term sheet, or finalized agreement, should go out to banks before the end of November.

The $7 billion in unpaid interest, incurred during 1989 and 1990, would be exchanged by Brazil for dollar-denominated bearer bonds, with a 10-year maturity and a three-year grace period.

Unlike bonds that are to be issued to cover payment on the principal Brazil owes banks, these bonds would not be collateralized by zero-coupon U.S. treasuries.

The broader agreement, covering some $44 billion in loans, calls for banks to exchange their loans into Brazilian government bonds at either face value or at a 35% discount but with a higher interest rate.

Brazil and Argentina are the only major debtor countries that have yet to implement debt reduction deals with banks under a three-year-old U.S. initiative.

Deal in Argentina

A similar debt reduction deal with banks - covering $23 billion in borrowings - was reached by Argentina in April.

That agreement has since bogged down because of a short-fall in collateral to back the bonds.

Argentina's creditors have so far agreed to exchange 30% of the debt into discount bonds.

Argentina, however, wants banks and other creditors to exchange at least 35% of the loans into so-called discount bonds at a 35% reduction on principal.

On Monday, Argentine Undersecretary of Finance Daniel Marx warned bankers there would be no deal unless they agreed to swap a larger percentage of the debt into discount bonds.

A senior banker in New York involved in the discussions said he expected, however, that Argentine will finalize the deal "within weeks" and that the final term sheet will be signed before the end of next month.

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