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As a practical matter, the major international banks, like
Citibank, that held large amounts of outstanding loans in Latin
American countries were compelled to help Brazil, Mexico, and other
Latin American countries work out their financial problems. These
major international banks and the governmental banking regulators
in the G-7 countries feared that a default by a Latin American
country, especially a major debtor country like Brazil, on its
foreign debt could trigger a collapse of the international banking
system. The banks and the regulators believed that a default by
one Latin American country on its foreign debt could lead to
worsening economic conditions which would cause other Latin
American countries to default on their foreign debts. For instance,
in 1982, Citibank held about $4.6 billion in total outstanding
Brazilian loans, an amount equal to an extremely high percentage of
Citibank's then net equity. Citibank thus could not afford to
write down its Brazilian loans, as such a writedown might lead to
its becoming insolvent for bank regulatory accounting purposes.
For its part, Brazil had to obtain considerable financial help
from the major international banks in attempting to work out its
financial problems. Brazil was desperately short of the foreign
currency needed for imports to keep its economy functioning.
N. Brazilian Foreign Debt Restructuring in General
As relevant to this case, the Brazilian foreign debt
restructuring that took place was divided into three phases: Phase
I, phase II, and phase III. Initially, the major international
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