-33-
the potential risk of higher external indebtedness. The extensive
borrowing made Brazil vulnerable when international interest rates
rose sharply in the early 1980's. It was difficult for Brazil to
maintain sufficient foreign currency (such as the U.S. dollar) to
repay its foreign debts.
In 1982, Mexico announced that it could not meet external debt
payments and declared a moratorium on its external indebtedness.
A general cutback in credit to most Latin American nations,
including Brazil, followed.
1. Deposit Facility Agreements and Blocked Deposits
Brazil attempted to deal with its debt problems by negotiating
with its foreign creditors to reschedule its indebtedness. The
negotiations resulted in various agreements including the 1983 and
1984 Deposit Facility Agreements (DFA's), and a 1986 amendment to
the 1984 DFA (the 1986 DFA). Under the terms of these agreements,
the principal amount of the loans made by international banks to
Brazilian financial institutions maturing in 1983, 1984, and 198617
would not be paid to creditors outside Brazil but rather would be
deposited with the Central Bank of Brazil (the Central Bank)18 in
dollar-denominated accounts on behalf of the respective creditors.
17 Despite the lack of a formal renewal, this arrangement
was continued into 1985.
18 The Central Bank is the principal banking regulatory
agency in Brazil, as well as the agency in charge of implementing
and enforcing national monetary policy, regulating money supply,
and controlling foreign exchange.
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