Winner Takes All as Brazil Banks Face $59 Billion Court Dispute

June 20, 2015

Brazilian banks would have to pay upfront if they were to lose a $59 billion class-action suit against them over government anti-inflation plans that caused depositor losses.

Government and banks were expecting that the damages could be diminished if they lost, either by postponing payments or reducing the amount, according to a senior government official and a bank executive. Yet laws governing the Supreme Court require at least eight of 11 votes in favor to reduce the immediate financial impact of the decision, a result that has become impossible after three judges recused themselves and Judge Marco Aurelio Mello said he opposed the plan.

“I’ve already made my position clear many times: I’m against,” Mello said in a phone interview on Monday. He said that without his support the court won’t be able to mitigate any ruling against the banks.

The Supreme Court is expected as early as August to resume the case that has been working its way through the judicial system for decades. The judges suspended the ruling in November 2013, after the central bank said a decision against the banks could drain a quarter of the lenders’ capital and further strain Brazil’s economy.

Banco do Brasil SA, Latin America’s largest bank by assets, and Itau Unibanco Holding SA, the biggest by market value, are among companies targeted by depositors seeking compensation for losses stemming from government policies adopted to fight hyperinflation in the 1980s and 1990s. The banks deny any wrongdoing, saying they implemented changes ordered by the government.

Biggest Concern

Itau Chief Executive Officer Roberto Setubal said in February that the case is the Sao Paulo-based bank’s biggest concern. Banks don’t have provisions to cover all the claims, according to the banking association, Febraban.

Brazil’s central bank estimated in 2013 that restitution could cost the industry about 150 billion reais ($48 billion). That would jump to about 182 billion reais with interest, based on the average annual benchmark rate for the period under review, according to data compiled by Bloomberg.

President Dilma Rousseff’s administration expected the Supreme Court to use as a model a March decision on a separate matter that gave cities and states until 2020 to pay some debt based on court order. That would relieve banks of the immediate financial impact, a government official said in a May interview.

Winner Takes All as Brazil Banks Face $59 Billion Court Dispute