Brazil looks for to extend the credit with a reform to the law of bankruptcies

By Gerald Jeffris, Dow Jones Newswires

BRASILIA (Dow Jones) -- While the Brazilian government fight by the approval of one controverted reform of the social security system, could be near obtaining an equally important advance for the economy with the proposal of a revision of the code of bankruptcies that already has means century of life.

Recognizing that the inflationary pressure will not allow that the government promotes the growth with the fast reduction of the main rate of credit of the country, the government of president Luiz Inácio Lula gives Silva has concentrated his attention in the high interest rates that receive the banks and the options that he has to do something on the matter.

"This law of bankruptcies is the positive news that it will increase the guarantees for the financial creditors and will reduce the rate of debt breach", it maintained Armando Castelar Pinheiro, economist of the Institute of Applied Economic Investigation, IPEA, employee of the government. "there is no action that by itself causes a miracle in the short term, but this one is a step important to increase the supply of credit".

The increase of the efforts to approve the changes in the law of bankruptcies of the country takes place in the middle of projections of which Brazil will only grow around a 1.8% east year, which would frustrate the aspirations of long term of the government to increase the use and to improve the distribution of the entrance.

The analysts emphasize that the total volume of total credits in Brazil is very low, in spite of the potential high yield for the creditors.

The Brazilian banking credits reach to a total near 40% of the gross internal product in comparison with a 140% of the GIP in the United States and a 109% in Europe. In April, the volume of credits reached a total of 214,600 million of real and the Brazilian banks received interest rates on the credit of consumption that divide equally 58.4%, near 32 percentage points on the interest rate of Selic reference. On the other hand, the rate of credits in Moor divided equally 8,8%.

The analysts think that this situation must to the present law of bankruptcies, that prohibe to the deserving banks to participate indeed in the reconstruction of the debts of the borrowers or in the reconstruction of assets. This, indicates, increases the risks of granting credits and promotes higher interest rates.

The present legislation of bankruptcies of Brazil it was created in 1945, during the incipiente industrialization of the country led by the president Getulio Populist Vargas. But the analysts indicate that the system does not respond to the demands of a greater competition.

"the main problem with the procedures of bankruptcy of Brazil is that they were designed for economic realities that no longer exist", it emphasized Thierry Wizman, strategist for Latin America of Bear Stearns in New York. "the editors of the law projected a stable macroeconomic enterprise atmosphere. Certainly they did not wait for a smaller paper for the state, nor an atmosphere in which the companies need to frequently change strategies of businesses or of reorganizing assets and liabilities to face the dynamic globalizada competition ".

The new measures that are being considered mainly aim to reduce the costs of the credits that receive the banks of the country.

According to studies made by the central bank, the differential of the rate of yield of the country - the difference between the rates to which the banks receive credits and the rates on which they grant it composes approximately of a 40% for the gains, 21% for the direct taxes, 8% for indirect taxes, 14% for administrative costs and 17% for slab overcome credits.

These two last factors have been the cause of which the reserves of the banks for losses by loans reach 7%, in comparison with a 5% or less in other economies of Latin America.

"There is very little credit available, and the administrative gains and costs are received to the small volume of money granted in credits", explained Castelar of IPEA. "If they manage to reduce the differential through smaller reserves of incobrables credits, this would help to increase the volume of credit and to reduce the administrative costs".

On the other hand, observers say that the main advance of the law proposal is that it would allow the recovery of companies in problems to the time that helps to fortify the guarantees from which the creditors will receive what he must to them in the case of the total liquidation of a company.

Under the present system, the companies with debt problems can ask for the partial condonación of the debt and the reprogramming of debts with creditors nonassured in a process similar to Chapter 11 of the Law of Bankruptcies of the United States.

Nevertheless, due to the weak guarantees for the inflexible creditors and rules for the reconstruction of companies, many companies finally are forced to close their operations, to sell assets and to dismiss workers to a process similar to Chapter 7 of the Law of Bankruptcies of the United States.

"At the moment it is very easy to declare bankruptcy and almost 80% of the companies that they ask for protection against the creditors do not manage to recover", emphasized the patrocinador of the law project, congressman Osvaldo Biolchi.