By Alonso Soto and Guillermo Parra-Bernal
BRASILIA/SAO PAULO Nov 27 Brazil's Supreme
Court began reviewing a two-decade old case on savings-account
interest payments on Wednesday that could cost banks almost a
third of their market value if they lose and throw a wrench into
Latin America's largest economy.
The court said it will start hearing the case immediately,
but said that it will not make a final ruling until early next
year. The decision to delay a ruling spurred a rally in the
shares of Brazil's four-largest listed banks, which had dropped
sharply as the government rang alarm bells over the potential
impact of the ruling.
An index of financial shares advanced the most in
nearly two weeks on Wednesday, gaining 1.5 percent in
mid-afternoon trading. The index had shed 4 percent in the
previous 10 days.
Government officials have warned of potential litigation
losses for state-run and private-sector banks stemming from
lawsuits filed by savings account holders in the late 1980s and
early 1990s. Plaintiffs allege banks failed to pay fair
remuneration on deposits during those years, when hyperinflation
led the government to peg rates paid on savings to a number of
The case highlights the legal uncertainties that haunt the
economy in Brazil, where tax disputes frequently force companies
into years of costly litigation. A ruling in favor of depositors
could cost banks up to 150 billion reais ($65.16 billion),
according to government estimates, though some legal experts and
political analysts doubt the court would award such a large
A decision in favor of depositors would be bad news for
President Dilma Rousseff and her attempts to jump-start Brazil's
slow-moving economy ahead of next year's presidential election,
in which she is expected to run for a second four-year term.
Since much of the impact would be on state-run lenders, the
ruling could fan government spending and increase the
possibility of a sovereign rating downgrade, analysts at Bank of
America Merrill Lynch said.
A ruling against banks "will cause huge damage to growth,
throw the financial system into chaos and bring about enormous
systemic risks," Antonio Delfim Netto, a former finance minister
and an adviser to Rousseff, told Reuters.
Over the last few weeks, Rousseff had dispatched cabinet
ministers to lobby supreme court justices to drop or delay the
case, a source told Reuters. Although most analysts expect the
court to rule in favor of banks, the risk of a decision against
them is not negligible.
The landmark case has raised fears that a decision to
compensate depositors would not only hamper the banks' capital
position, but also hurt the real economy by slashing the supply
of credit. Banks could reduce lending by 1 trillion reais in the
worst-case scenario, the central bank estimates.
In a rare sign of political unity, a group of former central
bankers and finance ministers led by former President Fernando
Henrique Cardoso wrote a letter to the Supreme Court warning of
the impact that ruling against banks could have on the country's
financial and economic stability.
Research groups estimate total losses could range from 18
billion reais to 600 billion reais, according to Goldman Sachs
Claims for damages differ, and justices are unlikely to
stick to one line of reasoning because of the inherent
differences in the policy plans that governed savings accounts.
"Given the numerous uncertainties, the impact of a Supreme
Court decision on individual banks is difficult to measure,"
said Carlos Macedo, Goldman Sachs' senior banking analyst in São
More than two-thirds of potential losses relate to the
impact of so-called policy plans I and II implemented during the
1990-92 presidency of Fernando Collor de Mello, with the
remaining stemming from the so-called Bresser and Verão plans
during José Sarney's 1985-89 administration.
At the time, Brazil's economy was besieged by runaway
inflation. Successive economic plans under Sarney and Collor
sought to tame inflation but ultimately failed, pushing Brazil
further into a tailspin until the creation of the real currency
in 1994 finally brought stability.
According to Daniel Sasson, an analyst at Credit Suisse
Securities, the court has hinted it may rule against depositors
in the Collor I and II plans, in line with previous lower court
rulings. For the Bresser and Verão plans, odds are against the
banks, he noted, meaning that their total exposure could be
closer to 45 billion reais.
State-run Caixa Econômica Federal, the largest
recipient of savings in Brazil, could be the most exposed to a
negative ruling, according to HSBC Securities. Banco do Brasil
SA, also controlled by the federal government and the
nation's biggest lender by assets, would suffer as well.
Private-sector banks facing significant losses include Itaú
Unibanco Holding SA, Banco Bradesco SA,
Banco Santander Brasil SA and the local unit of HSBC
A victory for depositors could hit government finances at a
time when public accounts are under scrutiny from investors,
said Carlos Thadeu de Freitas, a former central bank director.
The National Treasury might have to award emergency loans to
state banks, while the central bank might have to figure out
ways for private-sector lenders to remain well capitalized, the
"A negative decision could have a systemic impact in the
banking system that would exponentially raise the cost of
credit," Freitas said.