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### Viewing cable 04BRASILIA531, BRAZIL: EXTERNAL DEBT NOTES

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
04BRASILIA531 | 2004-03-08 10:05 | 2011-07-11 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Brasilia

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    UNCLAS SECTION 01 OF 02 BRASILIA 000531

    SIPDIS

    NSC FOR SHANNON, DEMPSEY, CRUZ
    TREASURY FOR OASIA/SEGAL
    EXIMBANK FOR DIRECTOR FOLEY
    FED BOARD OF GOVERNORS FOR ROBATAILLE
    USDA FOR U/S PENN, FAS/FAA/TERPSTRA
    USDOC FOR 4322/ITA/IEP/WH/OLAC-SC
    SOUTHCOM FOR POLAD
    BUENOS AIRES ALSO FOR TREASURY ATTACHE

    SENSITIVE

    E.O. 12958: N/A
    TAGS: EFIN ECON EINV ETRD PREL PGOV SOCI BR
    SUBJECT: BRAZIL: EXTERNAL DEBT NOTES

    REF: BRASILIA 0450

    This cable is Sensitive but Unclassified, please protect
    accordingly.

    ¶1.  (SBU) Summary:  The GoB hopes to use current relatively
    positive market sentiment and stronger foreign exchange
    rates to quietly rebuild reserves.  In contrast to very
    active reshaping of its domestic debt profile, the GoB has
    been fairly passive on external debt management.  While the
    recent unprecedented rise in value of Brazil's C-bond has
    created the opportunity for the GoB to repurchase these
    instruments, this seems unlikely at a point where the GoB is
    trying to rebuild reserves.  Meeting total public and
    private foreign amortizations of $43.9 billion in 2004 is
    not expected to be a problem.  End Summary.

    C-bonds
    -------

    ¶2. (U) Lula's success in reassuring international financial
    markets of the prudence of his macroeconomic policies has
    given Brazil new openings to tap international markets, as
    illustrated by its January 2004 30-year Eurobond issued at
    377 basis points above U.S. Treasuries.  This issuance was
    all the more remarkable since Brazilian bonds traded at
    spreads of 24% above U.S. Treasuries little over a year
    earlier.  Despite this, the GoB does not plan significant
    net new foreign debt issuance, using new issues primarily to
    roll over maturing foreign debt to avoid drawing down
    reserves.  The GoB has also been engaging in significant FX
    purchases to build reserves and smooth the exchange-rate
    effect of an April 2004 spike in foreign debt amortization.

    ¶3. (SBU) A Central Bank Director told Econoff February 19
    that investment banks were pitching him on an almost daily
    basis with various schemes to buy back Brazil's benchmark C-
    bonds, the most liquid of Brazil's Brady bonds.  The C-
    bonds, the product of an early 1990s' foreign-debt
    restructuring, reached 100% of their face value in February.
    This opened up the practical possibility of repurchasing all
    or part of the USD 6.5 billion in outstanding C-bonds.  The
    CB Director explained that the GoB has the option of
    repurchasing these bonds at the time of their biannual
    coupon payments (April and October), but must announce its
    intention to do so during a thirty-day window beginning
    sixty days before the coupon payment date.

    ¶4. (SBU) The C-bonds have since dropped below 100% of face
    value, complicating any repurchase deal.  The Central Bank
    Director noted in our February meeting, however, that it
    would not make much sense to attempt a repurchase on the
    scale required to redeem the C-bonds at a time when Brazil
    is trying to rebuild reserves.  If the right deal to swap
    the C-bonds for new, cheaper debt presented itself, however,
    the GoB might well take it, our interlocutor said.

    Amortizations for the Year
    --------------------------

    ¶5. (U) Managing Brazil's foreign public debt in 2004 should
    not pose a challenge.  The GoB has been working to manage
    the impact of this year's total $43.9 billion in public and
    private foreign debt amortizations on the exchange rate.
    The Finance Ministry is making use of a new rule that
    doubles to 180 days the horizon during which the Treasury
    may purchase foreign exchange for upcoming debt repayments.
    This allowed it to use stronger November and December
    exchange rates and lower seasonal foreign exchange demand to
    purchase dollars well in advance for the spike of public-
    debt amortizations of $4.3 billion in April.

       Scheduled Foreign-Debt Amortization, 2004
                     (Billions of USD)

                Private    Public/1      Total
         Jan       1.378          0.395       3.822
         Feb       1.001          0.598       4.77
         March     1.695          2.002       3.697
         April     2.417          4.282       8.092
         May       2.324          0.214       3.735
         June      2.909          3.034       5.943
         July      2.449          0.547       4.792
         August    2.571          0.453       2.118
         Sept      1.950          1.147       3.097
         Oct       1.730          1.185       3.912
         Nov       2.883          0.668       1.55
         Dec       3.668          1.96        5.628
         ---       ----           -----      ------
       Total     26.975    16.959       43.935

        1/Includes IMF amortizations
         Source: Central Bank and Ministry of Finance

    ¶6. (U) Combined with market expectations as of January 2004
    of a current-account deficit of 0.5% of GDP ($2.55 bn) and
    total private and public debt amortization of $43.9 bn,
    Brazil's total external financing requirements this year are
    forecast at$46.49 bn.  Officially, this financing need is to
    be met through expected foreign investment inflows of $11
    bn, leaving $35.3 billion to be met through a combination of
    debt rollovers, potential net new issuances of external
    debt, use of reserves and purchases of dollars.  Better than
    expected dollar inflows should reduce the financing need:
    net dollar inflows of $1.3 billion in February brought year
    to date inflows to $4.7 billion.  To smooth its debt
    repayment in the longer term, the GoB agreed with the IMF at
    the time of the extension of its IMF agreement in November
    2003 to delay by one year each of two repurchases of SDR 4
    billion (about US$5.5 billion) arising in 2005 and 2006.

    COMMENT
    -------
    ¶7. (SBU) While Brazil's overall debt profile is a continuing
    concern, its public foreign debt is in better shape, being
    of both longer term and lower interest rates than Real-
    denominated debt.  Strong foreign-exchange inflows,
    primarily due to the continued surprisingly strong trade
    surplus, should continue to cushion foreign debt
    amortizations for both public and private debt.
    VIRDEN

`