The central bank of Brazil said the future of monetary policy in Brazil could be compromised should the decision by the Supreme Court will not favor the country's largest lenders. Depositors had filed a case against Brazilian banks for losses they incurred in the past decades when the lenders implemented government policies. The depositors sought to be reimbursed for their losses in the 1980s and 1990s after banks put into action rules adopted by the Brazilian government to battle hyperinflation, Bloomberg reported.
In his presentation to the Supreme Court, central bank prosecutor Isaac Ferreira said, "If the Supreme Court deems the government's economic plans unconstitutional, the state will have to rethink the way in which it conducts monetary policy."
The central bank estimated that banks like Itau Unibanco Holding and Banco do Brasil would be paying BRL 149 billion or USD 64.3 billion should the court ruling goes against them. The lenders may also have to lower lending by up to BRL 1 trillion should that happens, the report said. This would be equivalent to 38% of the outstanding credit in Brazil's financial system. Banco do Brasil offers deposits as well as retail and commercial banking services to clients. Itau Unibanco Holding also attracts deposits and offers corporate and private banking services in addition to retail and commercial banking.
Banco Espirito Santo de Investimento Chief Economist Jankiel Santos told Bloomberg by phone, "The confusion and mess this would provoke would be very big. The lack of confidence and the credit crunch this would provoke could prompt the central bank to bring the tightening cycle to a halt."
According to the report, Attorney General Luis Inacio Adams had told court justices today that the government might be prompted to hike taxes if the Supreme Court ruled against the lenders. The high court's decision on the matter will be given in February.
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