-37-
outside of Brazil's debt-restructuring process; (2) increase the
probability of repayment of a portion of its outstanding Brazilian
loans; and (3) reduce petitioner's obligation to make new loans to
Brazil sufficient to pay at least part of the interest due on old
loans.
At this time (and until July 1987), Brazil's policies favored
debt-equity conversion transactions. Creditors were permitted to
use 1986 deposits to invest in Brazilian companies. If a creditor
decided to make such an investment, the Central Bank converted 100
percent of the face value21 of the deposits, plus accrued interest,
into cruzados at the official exchange rate. Pursuant to Central
Bank Circular 1.492 (the implementing measure concerning debt-equity
conversions), the creditor and the company in which it was investing
pledged "to keep the converted sums in Brazil for the minimum period
that may be established." The debt-equity conversion policies
benefited Brazil by allowing it to extinguish its foreign debt by
the amount of the debt converted, thereby eliminating its foreign
exchange obligation with respect to that portion of its debt.
The equity investment acquired as a result of a debt-equity
conversion was registered at the Central Bank as registered foreign
capital in the currency originally brought into Brazil by the
creditor. The amount registered could be increased annually by the
amount of retained earnings. Registration entitled the creditor to
21 In July 1987, the Central Bank ended the practice of
converting blocked deposits at full face value.
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