Emerging Markets : Bankruptcy Code Overhauled



Brazils President Luiz Incio Lula da Silva

President Luiz Incio Lula da Silva signed into law an overhaul of Brazils 60-year-old bankruptcy code in February, ending a decade of bureaucratic and legislative hurdles.

Finance minister Antonio Palocci says the new code, which should reduce business costs and fuel investments, will also help cut bank spreads over the long term. Brazilian banks have traditionally set higher lending rates in order to compensate for repayment risks in the event of bankruptcy by borrowers. While the central banks benchmark Selic rate stood at 18.25% in early February, consumers faced bank lending rates of as much as 60%, while corporates were paying upwards of 30%.

The new bankruptcy code, modeled after US legislation, gives banks priority in seizing assets provided as collateral, even ahead of tax authorities; sets a cap on payments to workers, who had previously been paid first; and establishes a time limit on bankruptcy proceedings that had been known to drag on for years. Banks, therefore, are expected to reduce spreads to reflect reduced risk.

While Brazils economy remains in strong recovery mode, local corporates are increasingly concerned that climbing interest rates may put the brakes on investments and trim growth prospects. The central bank has hiked the Selic rate on several occasions since last year, and there are signs that additional increases are in the works to curb inflation.

Although the central bank has set a 2005 inflation target of 5.1%, down from 7.6% in 2004 and as much as 12.5% in 2002, market players contend the rate will likely be closer to 5.7%. Central bank surveys show local corporates are not expecting any interest rate relief before September, after which they predict the government will have to push for lower rates or jeopardize long-term recovery efforts.

Santiago Fittipaldi