Brazilian Banks Could Owe More Than $140 Billion
Financial Times, February 18, 2014
A new report by Brazilian banks suggests a legal battle over the consequences of economic plans launched nearly three decades ago could cost them more than $140 billion, more than double their previous estimate.
Consumer advocates have said that amount is exaggerated and is a way for banks to pressure Supreme Court justices to get a favorable rule for financial institutions.
Savers across the country claim they weren't paid enough interest on their savings by banks as Brazil navigated its way through a series of economic plans designed to stabilize prices between 1986 and 1991. As the government sought to cut down on inflation, savers claim the interest on savings accounts didn't keep up with rising prices.
The new report by the Brazilian Federation of Banks, or Febraban, which was seen by The Wall Street Journal, indicates the costs could be anywhere between 23 billion Brazilian reais ($9.6 billion) and, in a worst-case scenario, 341 billion reais. The report, prepared by São Paulo-based consulting firm LCA, estimates the banking system as a whole has set aside just 8.3 billion reais to cover potential losses.
Government officials have warned that a ruling against the banks in line with the worst-case scenario could damage the financial system and harm economic growth. Representatives of the savings account holders, such as consumer-rights organization Idec, have said the estimates are inflated.
The dispute is one of the most high-profile examples of how the complexity and the delays in the Brazilian legal system can hamstring business and finance. Analysts have said these types of cases harm confidence, stop companies from investing and make the economy less efficient and dynamic.
It is also another test for the 11 justices of the Supreme Court, who have just emerged from one of the largest corruption trials in the country's history. They convicted 25 people for involvement in a scheme that bribed members of Congress in exchange for their votes on government-backed legislation during the administration of former President Luiz Inácio Lula da Silva.
There is a two-step process for the holders of savings accounts. First, the Supreme Court must decide whether the economic plans in the 1980s and 1990s were constitutional. If the court finds they weren't, hundreds of thousands of Brazilians with savings accounts would be able to proceed with lawsuits in lower courts seeking compensation from the country's largest financial institutions.
As so often happens in Brazil, the legal case has dragged on for nearly two decades in lower courts and has been on the Supreme Court's docket since 2010. Experts have said the cases could continue for many more years before banks have to pay out any money.
It all began in February 1986, when the government froze everything from beef prices to rents to salaries and managed to bring down annual inflation to 76% from around 500%, albeit temporarily. Prices spiraled out of control again the following year. Six years and four economic plans later, inflation in 1993 hit 2,500%.
Finance Minister Guido Mantega and central bank governor Alexandre Tombini have both been to the court to express their concerns about the consequences of a decision against the banks. Critics have said this is simply to pressure the court, and the justices have said they won't be swayed.
"There is no telling what the liabilities from this judgment will be," said Justice Marco Aurélio Mello in an interview. "The judiciary isn't engaged in any government policy. If acts were committed against the constitution, the Supreme Court has to rule."
Febraban said if the worst-case scenario materializes, banks would have to curtail spending to be able to build up cash piles with which to pay savers. The banks warn a reduction in credit could further damage an already weakened economy. Brazil is entering its fourth year of below-average growth, and the economy may even have contracted in the second half of 2013. The banks hope that threat could be enough to prevent the Supreme Court from ruling against them
Febraban declined to comment on the figures in the new report. The banks were following government rules and aren't to blame for the problems, said Febraban Chairman Murilo Portugal.
"Banks didn't profit from changes in the saving accounts," Mr. Portugal said in an interview.
Analysts with investment bank Credit Suisse estimated the losses to Brazilian banks would be in the range of 8 billion Brazilian reais to 26 billion reais based on a report produced by São Paulo law firm Madrona Hong Mazzuco Sociedade de Advogados. Credit Suisse declined to comment for this article.
A decision for the savers could be a burden for the government at a time when it is trying to cut back after years of spending to prop up the weak economy. Government-owned savings bank Caixa Economica Federal faces a bill for some 49 billion reais, according to the latest Febraban report. A CEF official who asked not to be named said the number could be much less, as the bank has already paid some customers.
"Government-owned banks will be the hardest hit [by the lawsuits] and the government will have to inject resources in these banks," said Carlos Kawall, chief economist at Banco Safra. "It will have an impact on government finances." Banco Safra isn't involved in the suit.
The consumer-advocacy group Idec argues that the overall cost would be much lower. Plaintiffs have died since the cases were first brought, and lower courts have narrowed the number of people with legitimate claims, said the group's director Marilena Lazzarini.
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