In the City

The road from Rio

Jock Bruce-Gardyne

Iwas bidden to lunch last week with one of our leading engineering firms. Others present included a senior mer- chant banker, and an export director specialising in Latin America. They were both full of the joys of spring. At last, after months of cliff-hanging negotiation, the latest package of bank support for Brazil had been put in place. The awesome spectre of default by the world's largest sovereign debtor had been banished. We could all breathe again.

Had they, I asked innocently, seen the report carried that same morning in the city columns of the Daily Telegraph, to the ef- fect that the Prime Minister had firmly and finally ruled out the provision of any 'new' cash for Brazil? Their faces fell. They had not. In truth the Daily Telegraph did not really break new ground. For many months the official British position has been that while the UK commercial banks were en- tirely at liberty to participate in the 'refinancing' of Brazil's commercial debt, and while there was no question of a veto on the $2.5 billion contribution by way of new government export guarantees for Brazil which the International Monetary Fund's M de Larosiere was seeking to drum up, like Sam Goldwyn our response would be 'include us out'.

Hope, however, springs eternal. It was well known that the Bank of England was not entirely happy in its work on the Brazil affair; and that the Department of Trade and Industry was miserable at the prospect of future export contracts to Brazil going up the spout. Indeed, Alex Fletcher, the junior trade minister, was, somewhat in- congruously, conducting a pep talk about investment in Brazil this Tuesday. There was — there is — always a chance of second thoughts prevailing until the share-out of the £2.5 billion (which M de Larosiere has said he has been promised) between the

various central banks has been signed and sealed. So it is still — just — worth con- sidering what there is at stake.

On the face of it the British Govern- ment's stance has been eminently understandable. After all, what has so far been agreed with such a fanfare, put in laymen's terms, is that the banks — both central and commercial — which have lent money to Brazil will cough up the cash to pay themselves their interest due. True, the IMF has obtained from the Brazilians a commitment to put their house in order. But then it did that last year, and nothing very noticeable resulted; and this time Brazil's own central bank governor, on handing in his cards, warned that that the IMF's presentation would prove too stiff for his country's stomach. It takes a vast act of faith to believe that Brazil will be any better able to service new debts than it has been able to service those it has contracted up to now. Commercial banks may wish to make that act of faith for the simple reason that if they declined to do so, then their ex- isting loans would have to be written off as 'non-performing', which would make the balance sheets of some of them lopsided, to put it politely. Governments are under pressure of self-interest to underwrite new export credits.

Like it or not, however, that.is what they have agreed to do. They have done so for two reasons. First, because rescuing Brazil from debt is a quadrille, in which the IMF, the commercial banks, the central banks, and governments each have a role. If one group refused to take the floor the dance could not commence. But their consolation is that extra export credits mean orders for their domestic businesses which would otherwise go abroad.

More fools they, it may be argued. A shop that advances credit to a well-known bankrupt because it hears adjacent shops are prepared to do just that deserves all that comes to it. There are, however, counter- vailing arguments. For one thing, if other governments took the stance that ours has taken there would be no rescue package; and while the American banks would have to bear the brunt of Brazilian default, no bank is an island. For another, Brazil (unlike some other sovereign debtors one could think of) must be destined to come right before too long, however bleak the immediate prospect may be. Unless Whitehall has a belated change of heart British businesses will not be there to benefit.

In theory they can still flog their goods for cash, or match from their own resources (or rind someone else to match for them)

the credit terms that other governments will continue to make available to their traders.

But unless they have something unique and deemed indispensable by the Brazilians whisky, for example, or grouse moors? — they can just about forget it. 'It' is an ex-

port trade worth £150 million a year. A fleabite, in short. But by the same token

cheap to retain — as a hold for better things to come hereafter. The Overseas Develop- ment Administration spends its time giving cash to far more dubious borrowers to enable them to 'buy' our goods. Refusing new credit to Brazil when others are all too ready to supply it looks shortsighted.

Meanwhile, how pleasant to know Sir Denis Mountain — or at least to be one of his shareholders at Eagle Star. If one were a shareholder of BAT's Mr Sheehy, however, one might be inclined to fasten one's lapstrap (or ask for the exit). Back in the days of innocence before Allianz came in with its original bid for the Eagle Star shares it didn't already own, the market reckoned Sir Denis's business ranked a yield of more than 7 per cent which, given its past record, did not look excessively cur- mudgeonly. One does not have to swallow at face value Allianz's arguments about the merits of being 'the biggest aspidistra in the

world' — or at any rate in Europe — to see the logic of the German company's deter-

mination to win its prize if it can. Unable to expand further on its native soil, a solid presence on the London market is its ob- vious way forward. Besides, having bought its initial holding in Eagle Star for a good deal less than a half of the present price, it can well afford to average.

The logic of BAT's enthusiasm is less im- mediately apparent. Of course it is con- ceivable that a contented Eagle Star

management would reward its rescuers from the rough Bavarians by making its assets sweat to redeem the price BAT had paid for them in a way it has not contrived to do heretofore. If so it would generate a performance to make the managements of the tobacco international's other diver- sification blush. But if — as appeared to be

in prospect as this issue of the Spectator went to press — the institutions have en- dorsed BAT's latest bid at the shareholders meeting on Thursday they must have been willing to take a lot on trust.