Brazil's stand on debt payment rains on Wall Street's Carnival
| New York
``Blame It on Rio.'' Yes, that was the name of a bygone third-rate flick. But brokers have copped the phrase to console investors holding New York money-center bank stocks.
International bank stocks were knocked flat last week when Brazil slammed the door on its foreign creditors. On Feb. 24 President Jos'e Sarney stopped interest payments on $68 billion in outstanding loans to buy some time for his country's stuggling economy.
How long before big banks stocks rebound? That's uncertain.
What at first seemed to be merely a bargaining position by Brazil now looks like a well-planned effort to have banks reform their debt policy toward the Latin nation.
At midweek, Brazil told its commercial bankers to suspend payments on short-term loans, too. And Finance Minister Dilson Funaro is now on a political lobbying tour to win support from creditor governments, but he says he won't be talking to commercial bank officials yet.
``The question now is how long this will take to work out,'' says James J. McDermott, research director of Keefe, Bruyette & Woods Inc., a firm specializing in bank industry analysis.
``They haven't even broken bread with the banks yet. When they do, we'll have a better feel of how intractable their position is,'' Mr. McDermott says. ``As long as the outcome remains unclear, there will be pressure on bank stocks.''
Uncertainty also gripped the Dow Jones industrial average for the first week since the start of 1987. The Dow closed at 2,223.99 on Friday, down 11.25 points in five session.
But the pause, technical analysts say, may simply be to refresh the market after two months of bullishness. Investors Intelligence, which follows this ``sentiment'' indicator, says 54 percent of newsletter advisers are bulls and only 13 percent are negative. By Wall Street's contrarian logic, the market is getting toppy.
Brazil-related profit taking did shave the share prices of Chase Manhattan, Citicorp, Manufacturers Hanover, and J.P. Morgan. BankAmerica's stock weakened, too, but that may be because of a Brazil-induced delay in plans to raise $1 billion in capital.
It's unlikely investors will be eager for a piece of the San Francisco-based bank while Brazil remains a question. BankAmerica is the third-largest US lender to Brazil, with about $2.7 billion in loans.
Citicorp has the biggest outstanding loans ($4.6 billion), and Chase is No. 2 with $2.8 billion.
But measuring loans to Brazil as a percentage of total bank assets (1986 year-end): Manufacturers Hanover ranks No. 1, with 2.96 percent; Chase No. 2, 2.95 percent; BankAmerica No. 3, 2.61 percent; and Citicorp No. 6, 2.35 percent.
So if Brazil does not make any interest payments at all this year, analysts estimate, some of these banks could be looking at a 10 to 15 percent-per-share hit against 1987
At this point, McDermott says it's difficult to judge whether Brazil's debt moratorium will last until May or stretch to December. But ``there could be significant additions to the non-performing loan accounts.'' If payments are not received in 90 days, banks must relegate loans to their list of non-performing assets.
On balance, McDermott remains sanguine. ``This debt problem has reared its ugly head several times over the last five years. It will eventually work itself out.''
He notes that since the Mexican crisis in 1982, the banks have built up large loan loss reserves, diversified, sold off some bad loans, and generally strengthened their balance sheets.
Indeed, McDermott sees the fear here as creating a good buing opportunity in J.P. Morgan and Bankers Trust, which are widely considered to be the stoutest money-center banks. He would also go for Citicorp if the price dips to $50 a share.
Sy Jacobs disagrees. ``The money-center banks may be very cheap stocks, but they're hard to sleep with,'' says the senior financial analyst at L.F. Rothschild, Unterberg, Towbin in New York.
``I'd rather go with a quality regional bank in a strong local economy where you don't have to worry about Brazil making its next debt payment,'' he says.
Indeed, some regional stocks strengthened as investors speculated on potential interstate bank takeovers and fled the money centers. Interest in West Coast banks was stimulated by $1.1 billion purchase by the Los Angeles-based Security Pacific of Rainier Bancorp in Seattle. Investors reasoned that if Security Pacific will pay two times book value to expand its network, other regional banks might be worth a premium, too.
The case for regional banks is further bolstered if one assumes that other Latin nations will hop on Brazil's no-pay bandwagon.
If major banks are in jeopardy, the Federal Reserve would loosen credit.
``If the whole thing blew up, if it extended to Mexico, Argentina, Ecuador, etc., then you could have a significant drop in rates - perhaps one-half to a point,'' says economist David Wyss at Data Resources Inc.
But Dr. Wyss and most other observers now say that's a far-fetched possibility. Last Thursday, Argentina got a $500 million bridge loan to tide it over until it finishes negotiating for a $2.15 billion loan from commercial banks. Mexico also recently secured new loans.
``I think that pretty soon Brazil will be clearly out there on its own,'' says McDermott.