US embassy cable - 05BRASILIA770

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, Domestic Security & Crime 
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