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 indexes.
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 settlement.
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 Group Inc.
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 Paulo.
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 Holdings Plc.
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 analysts added.
"A negative decision could have a systemic impact in the banking system that would exponentially raise the cost of credit," Freitas said.