Bank of Montreal &lt;BMO.M> Chairman William Mulholland said he was reasonably optimistic that debt negotiations between Brazil and its commercial bank creditors can be accomplished satisfactorily in the long run. Its going to be a bit rocky short term ... a couple of months ... but I am reasonably optimistic longer term he told a press briefing here. Earlier Mulholland announced that Bank of Montreal has formally applied to swap up to 100 mln dlrs of its roughly one billion dlr cross border exposure to Brazil into local equity investments under a novel conversion scheme. Tensions have been running high between Brazil and its bank creditors since President Jose Sarney imposed a unilateral suspension of interest payments on some 68 billion dlrs of commercial bank debt on February 20 bankers said. Only yesterday three leading U.S. banks voluntarily put their Brazilian loans on non-accrual status and took a hefty cut in net income for the first quarter ended March 31. Bankers saw this as a clear refusal to be intimidated into granting major concessions as forthcoming refinancing talks. Bank of Montreals Mulholland regretted Brazils action but declined to discuss what action his bank might take. Mulholland merely said that Bank of Montreal had not canceled any of its short-term credit lines that came up for renewal on March 31. However John Bradlow senior vice president of the corporate and goverment banking division said that it was possible that Bank of Montreal might follow the U.S. banks lead in its second quarter results accounting. A decision will be made at April 30 or in the first weeks of May he told reporters after the briefing. Unlike most major U.S. banks whose reporting year ends on December 31 Canadian banks operate on a November through October basis. At the press briefing Mulholland detailed the proposed debt/equity conversion scheme which is aimed at boosting investment capital and conserving foreign exchange reserves. Unlike many existing programs Bank of Montreal intends to sell its own dollar-denominated debt at par to either the obligor or local investors for cruzados which would then be ploughed into Brazilian assets. Mulholland said current debt/equity schemes in which bank debt is often sold to foreign third parties at a discount were like peddling off debt at fire sale prices. He added that they could do pyschological harm to investor confidence. While acknowledging that Brazil has yet to give its official blessing to the plan Mulholland predicted if it is supported we are going to see more of this. Sources at other large banks with sizeable exposure to Brazil were not so sure about the schemes success. I dont think its going to fly because of the impact it would have on money supply and other political reasons said one banker noting that earlier informal proposals along the same lines received fairly neutral responses. And is there a market for such investment in a time of great uncertainty he added. Mulholland admitted it is something of an experiment.... some one has to screw up the courage and do something. It is very important that avenues (to reversing net capital outflows) are broadened he added noting that in recent years the options have in fact been narrowing. Another senior banker agreed that debt/equity swap proposals such as Bank of Montreals should be explored and developed but warned that Brasilia has been very ambivalent about debt/equity schemes thus far. The banker added debt/equity conversion should happen but it is not a major instrument for solving debt problems.
BANK MONTREAL REASONABLY OPTIMISTIC ON BRAZIL