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MONDAY, NOVEMBER 25, 2013 - 10:32

Brazil Court Decision Wednesday Could Cripple Banking System

--Analysts Say Worst Case Scenario Unlikely but Not Impossible

SAO PAULO (MNI) - Brazil's Supreme Court Wednesday is scheduled to hear a class action lawsuit against the

country's biggest banks.

Brazilians who had bank accounts between 1987 and 1991, when the government ordered various plans to

fight hyperinflation, are suing for compensation. Several plans froze accounts and required banks to pay

interest on savings accounts at levels well below inflation.

The government estimates that if the court decides in favor of savers and against banks, as it has done in a

number of smaller cases, it could cost the financial system as much as R$149 billion ($65 billion) - nearly one

third of the Brazilian bank system's total equity.

The government last week sent Central Bank President Alexandre Tombini and Finance Minister Guido

Mantega to tell supreme court justices that such a decision would have a catastrophic impact on the banking

system.

In such a worst-case scenario, Brazil's third-largest bank, the government controlled Caixa Economica Federal,

would see a bill equal to 206% of its equity, according to a report by Credit Suisse.

Itau and Bradesco, the country's largest private-sector banks, would each face bills equal to over 30% of their

equity.

Andre Riva Gargiulo, senior Brazilian banking analyst for Grupo Bursatil Mexicano in Sao Paulo, told MNI

Monday that such a worst-case scenario would cause credit to contract massively.

The central bank would likely intervene to keep any banks from failing, he said, and it could mitigate the impact

by easing reserve requirements and risk-rating factors, but a negative court decision would still send the

economy into recession for several years.

"Traditional monetary policy, such as the basic interest rate, would become largely ineffective since the banks

would not have credit to offer," he said.

But Gargiulo said he did not expect such a disaster to occur.

"The other cases that the banks lost were far smaller. We believe the supreme court will take into account the

possible impact on the overall economy."

Credit Suisse's analysts have a similar opinion, writing in their report last Friday that, "Given the huge impact

such litigation could have on the financial system and on the economy, we think it is unlikely that the banks will

lose the cause in Court (or at least the value lost would not be even near the figures released)."

Luis Miguel Santacreu, banking analyst at the Brazilian credit ratings agency Austin Ratings, is less certain.

Santacreu said that "the lawsuit clearly has some merit, otherwise it would not have gone all the way to the

Supreme Court" and that it is hard to make odds, since there is no precedent in the legal system for any case of

this size.

Given the lack of precedent, it is unclear how many of the justices will take the economic impact into account

and how many will focus only on the letter of the law, he said.

But Santacreu said it is most likely that the court will find a middle path that offers some compensation, though

far less than R$149 billion, and perhaps give the banks an extended period to pay it.

"This case has been going on for years, and the banks have been making some reserves, so a moderate

decision would be easily absorbed," he said.

The Supreme Court begins its hearings Wednesday, and the decision could come this week or only until early

next year.

** MNI - Sao Paulo **

By Daniel Horch

25/11/13 Brazil Court Decision Wednesday Could Cripple Banking System | MNI

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