The tone of the speech was neither defiant nor belligerent, but the words were fraught with danger for bankers around the world. As the television camera zoomed in and a concerned nation watched, a somber Brazilian President Jose Sarney dispensed with niceties and got right to the point: "I want to announce that the country is suspending payments of interest on its foreign debt." The action was necessary, he said, to prevent Brazil from running out of money. Still, he continued, "it was not easy to make a decision of this magnitude."
Indeed, its magnitude can hardly be overstated. Brazil is supposed to pay about $800 million in interest every month on its staggering $108 billion foreign debt. If the suspension of those payments goes on for long, it would be a direct hit on the earnings of dozens of major banks in the U.S. and Western Europe. It could set a perilous precedent for other major Latin American debtors, including Mexico ($105 billion owed) and Argentina ($52.3 billion). But as disturbing as Sarney's decision was, Brazil's deepening economic woes and dwindling currency reserves made it almost inevitable.
While not saying when Brazil might resume payments, Sarney expressed willingness to negotiate an interest formula that his country could meet without risking "recession and social crisis." He never used the word default and insisted his aim was not confrontation: "Brazil does not wish to be an autarkic economy outside the world community."
Bankers reacted calmly to the speech, perhaps only because they had seen it coming. Said Rimmer De Vries, chief international economist of New York City's Morgan Guaranty Trust: "The suspension of payments is not a surprise to the banks. What is difficult to understand, however, is how things could have deteriorated so quickly. Brazil has gone completely over the cliff."
The most obvious sign of the country's economic troubles is the return of runaway inflation. After being frozen by the government for much of last year, prices are rising at a 545% annual rate in Brazil, the highest level ever for a country that was notorious for its triple-digit inflation earlier in the 1980s. As prices have leaped, interest rates have surged to more than 700%, dealing a devastating blow to business. Economists predict that Brazil's real growth rate will be cut in half this year, to less than 4%. The trade surplus, which provides the only cash the country has for paying interest, has dwindled from an average of $1 billion a month throughout much of last year to $129 million in January.