BRAZIL: CENTRAL BANK ON BANCO SANTOS CASE

UNCLAS SECTION 01 OF 02 BRASILIA 000770

SIPDIS

SENSITIVE

USDA/FAS FOR OA/ETERPSTRA AND OGSM/KMILLER
USDA/FAS FOR EXPORT CREDITS/MCHAMBLISS AND RTILSWORTH
USDA/CCC FOR TRYAN, ALEUNG and KCHADWICK
USDA/FAS FOR FAA/WHAO/JBAILEY
BUENOS AIRES FOR MHARSAAGER
USDOC FOR 4332/ITA/MAC/WH/OLAC/MCDOUGALL/DRISCOLL,BASTI AN
USDOC ALSO FOR 3134/USFCS/OIO/EOLSON,DDEVITO
STATE PASS EXIMBANK
STATE PASS OPIC FOR DMORONESE, NRIVERA, CMERVENNE
DOL FOR ILAB PEREZ-PKOPEZ AND WHOLEY
NSC FOR KIM BREIER
TREASURY FOR FPARODI
TREASURY FOR OCC - BANK SUPERVISION
STATE PASS FEDERAL RESERVE BOARD OF GOVERNORS

E.O. 12958: N/A
TAGS: EFIN EAGR ECON PREL BR
SUBJECT: BRAZIL: CENTRAL BANK ON BANCO SANTOS CASE

REF: SAO PAULO 168

This cable is Sensitive but Unclassified, please protect
accordingly.


1. (SBU) The Ambassador met Central Bank President Henrique
Meirelles March 17 to advocate on behalf of American
creditors to Banco Santos, a Brazilian bank that has been
under Central Bank intervention since November 2004
(reftel). The Ambassador relayed the desire of U.S.
creditor banks, which are owed between $80 - $100 million,
primarily in trade credits, for a restructuring to keep the
bank afloat. Should the bank be liquidated, the Ambassador
asked that American creditors be treated equitably. He
noted that the U.S. Commodity Credit Corporation (CCC)
guaranteed almost $9 million of import credits, giving the
USG a direct interest in the case. Meirelles said that a
restructuring would depend primarily upon the creditors and
shareholders, who must come up with a viable plan to keep
Banco Santos afloat. Such a plan would require the approval
of two-thirds of the creditors and a majority of the
shareholders. End Summary.


2. (SBU) Representatives of several U.S banks with exposure
to Banco Santos briefed the Ambassador by conference call
prior to the meeting with Meirelles. The U.S. banks, which
have between $80 - $100 million in exposure to Banco Santos,
expressed their strong preference for a restructuring deal
that would re-float Banco Santos, giving them a better
chance of recovering their credits. The banks are working
on options for restructuring and are meeting almost weekly
with the head of the intervention. They nevertheless
complained that there was little transparency in the
process. They have hopes of recovering their pre-paid
export credits (as much as $57.2 million of the total),
since these are given special treatment under law, being
guaranteed by the still-pending final payment for the
export. The U.S. banks hoped that the Central Bank would
choose to treat import credits similarly, although they
acknowledged they do not have the same legal standing.


3. (SBU) The Ambassador conveyed to Meirelles the U.S.
banks' strong preference for a restructuring deal. He asked
that, if Banco Santos ultimately were liquidated, that U.S.
banks be given equitable treatment. He informed Meirelles
that there was direct USG interest in this case given CCC
guarantees of almost $9 million in commodity import credits
financed by U.S. banks through Banco Santos.


4. (SBU) Meirelles was joined by his deputies for bank
supervision, Paulo Cavalheiro, and for banking liquidiation
and privatization, Antonio Matos do Vale. They explained
that while the Central Bank appointed the intervention team
and had some discretion to "pull the plug" on the
intervention and move to immediate liquidation, it did not
have discretion to force a restructuring. This had to be
agreed among the creditors and shareholders. Two thirds of
the former and a majority of the latter must agree to the
restructuring. Meirelles and Matos do Vale confirmed that
pre-paid export credits would be paid using the proceeds of
the export sales, but that import credits were given equal
treatment with "other debts."


5. (SBU) Meirelles confirmed that a judge had ordered the
seizure of Banco Santos proprietor Edemar Cid Ferreira's
assets, including an ostentatious Sao Paulo residence and an
extensive art collection. Meirelles shook his head,
commenting that each piece of art was owned by a different
offshore shell company, complicating efforts to trace the
ownership back to Ferreira, a necessary step for them to be
confiscated and auctioned to cover Banco Santos' debts. He
explained that, to evade Central Bank supervisory controls
while looting his bank, Ferreira also had large borrowers
borrow more than they needed, sign over the excess to one of
his shell companies, and only carry an obligation to pay
back only the remaining portion of the loan. Meirelles
lamented that, since the borrowers had contracts from Banco
Santos acknowledging the payment to the offshore company as
satisfying that portion of their loan payment obligations,
in the eyes of some judges this reduced the amount they
legally owed to Banco Santos. The ultimate effect, however,
is that Banco Santos assets are worth much less than the
face value of the loans made, and contributing to the bank's
Reais 3 billion negative net worth.


6. (SBU) Comment: Banco Santo's negative net worth,
estimated at negative Reais 3 billion (USD 1.1 billion),
will be a big obstacle to a successful restructuring, since
it will likely require creditors to come up with injections
of new money.

DANILOVICH