This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 BRASILIA 000531 
 
SIPDIS 
 
NSC FOR SHANNON, DEMPSEY, CRUZ 
TREASURY FOR OASIA/SEGAL 
EXIMBANK FOR DIRECTOR FOLEY 
FED BOARD OF GOVERNORS FOR ROBATAILLE 
USDA FOR U/S PENN, FAS/FAA/TERPSTRA 
USDOC FOR 4322/ITA/IEP/WH/OLAC-SC 
SOUTHCOM FOR POLAD 
BUENOS AIRES ALSO FOR TREASURY ATTACHE 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV ETRD PREL PGOV SOCI BR
SUBJECT: BRAZIL: EXTERNAL DEBT NOTES 
 
REF: BRASILIA 0450 
 
This cable is Sensitive but Unclassified, please protect 
accordingly. 
 
¶1.  (SBU) Summary:  The GoB hopes to use current relatively 
positive market sentiment and stronger foreign exchange 
rates to quietly rebuild reserves.  In contrast to very 
active reshaping of its domestic debt profile, the GoB has 
been fairly passive on external debt management.  While the 
recent unprecedented rise in value of Brazil's C-bond has 
created the opportunity for the GoB to repurchase these 
instruments, this seems unlikely at a point where the GoB is 
trying to rebuild reserves.  Meeting total public and 
private foreign amortizations of $43.9 billion in 2004 is 
not expected to be a problem.  End Summary. 
 
C-bonds 
------- 
 
¶2. (U) Lula's success in reassuring international financial 
markets of the prudence of his macroeconomic policies has 
given Brazil new openings to tap international markets, as 
illustrated by its January 2004 30-year Eurobond issued at 
377 basis points above U.S. Treasuries.  This issuance was 
all the more remarkable since Brazilian bonds traded at 
spreads of 24% above U.S. Treasuries little over a year 
earlier.  Despite this, the GoB does not plan significant 
net new foreign debt issuance, using new issues primarily to 
roll over maturing foreign debt to avoid drawing down 
reserves.  The GoB has also been engaging in significant FX 
purchases to build reserves and smooth the exchange-rate 
effect of an April 2004 spike in foreign debt amortization. 
 
¶3. (SBU) A Central Bank Director told Econoff February 19 
that investment banks were pitching him on an almost daily 
basis with various schemes to buy back Brazil's benchmark C- 
bonds, the most liquid of Brazil's Brady bonds.  The C- 
bonds, the product of an early 1990s' foreign-debt 
restructuring, reached 100% of their face value in February. 
This opened up the practical possibility of repurchasing all 
or part of the USD 6.5 billion in outstanding C-bonds.  The 
CB Director explained that the GoB has the option of 
repurchasing these bonds at the time of their biannual 
coupon payments (April and October), but must announce its 
intention to do so during a thirty-day window beginning 
sixty days before the coupon payment date. 
 
¶4. (SBU) The C-bonds have since dropped below 100% of face 
value, complicating any repurchase deal.  The Central Bank 
Director noted in our February meeting, however, that it 
would not make much sense to attempt a repurchase on the 
scale required to redeem the C-bonds at a time when Brazil 
is trying to rebuild reserves.  If the right deal to swap 
the C-bonds for new, cheaper debt presented itself, however, 
the GoB might well take it, our interlocutor said. 
 
Amortizations for the Year 
-------------------------- 
 
¶5. (U) Managing Brazil's foreign public debt in 2004 should 
not pose a challenge.  The GoB has been working to manage 
the impact of this year's total $43.9 billion in public and 
private foreign debt amortizations on the exchange rate. 
The Finance Ministry is making use of a new rule that 
doubles to 180 days the horizon during which the Treasury 
may purchase foreign exchange for upcoming debt repayments. 
This allowed it to use stronger November and December 
exchange rates and lower seasonal foreign exchange demand to 
purchase dollars well in advance for the spike of public- 
debt amortizations of $4.3 billion in April. 
 
   Scheduled Foreign-Debt Amortization, 2004 
                 (Billions of USD) 
 
            Private    Public/1      Total 
     Jan       1.378          0.395       3.822 
     Feb       1.001          0.598       4.77 
     March     1.695          2.002       3.697 
     April     2.417          4.282       8.092 
     May       2.324          0.214       3.735 
     June      2.909          3.034       5.943 
     July      2.449          0.547       4.792 
     August    2.571          0.453       2.118 
     Sept      1.950          1.147       3.097 
     Oct       1.730          1.185       3.912 
     Nov       2.883          0.668       1.55 
     Dec       3.668          1.96        5.628 
     ---       ----           -----      ------ 
   Total     26.975    16.959       43.935 
 
    1/Includes IMF amortizations 
     Source: Central Bank and Ministry of Finance 
 
¶6. (U) Combined with market expectations as of January 2004 
of a current-account deficit of 0.5% of GDP ($2.55 bn) and 
total private and public debt amortization of $43.9 bn, 
Brazil's total external financing requirements this year are 
forecast at$46.49 bn.  Officially, this financing need is to 
be met through expected foreign investment inflows of $11 
bn, leaving $35.3 billion to be met through a combination of 
debt rollovers, potential net new issuances of external 
debt, use of reserves and purchases of dollars.  Better than 
expected dollar inflows should reduce the financing need: 
net dollar inflows of $1.3 billion in February brought year 
to date inflows to $4.7 billion.  To smooth its debt 
repayment in the longer term, the GoB agreed with the IMF at 
the time of the extension of its IMF agreement in November 
2003 to delay by one year each of two repurchases of SDR 4 
billion (about US$5.5 billion) arising in 2005 and 2006. 
 
COMMENT 
------- 
¶7. (SBU) While Brazil's overall debt profile is a continuing 
concern, its public foreign debt is in better shape, being 
of both longer term and lower interest rates than Real- 
denominated debt.  Strong foreign-exchange inflows, 
primarily due to the continued surprisingly strong trade 
surplus, should continue to cushion foreign debt 
amortizations for both public and private debt. 
VIRDEN