As another alternative without currency risk, the Brazilian subsidiary would borrow its cruzeiro requirement from local investment banks. The six-month investment bank loan rate was regarded as the Brazilian prime rate and was related to the banks' CD rate, which had a minimum term of six months, according to Central Bank regulations.
A legal rate control imposed by the Central Bank of Brazil prevented large banks from charging more than 20 percent per annum over monetary correction on a six-month loan. Taking into account semiannual compounding, this came to 9.54 percent for six months. For small banks, the limit was 24 percent per annum. But as in other high-inflation countries, it was very difficult, if not impossible, to control interest rates in Brazil. Bankers were accustomed to living with interest rate controls and had quickly developed a number of ingenious ways to circumvent them on both CDs and term loans, such as discounts for CDs and commitment fees and/ or compensating balances for loans. Thus the old trick of charging a commitment fee up front had become general practice in recent years. Although fees varied, the most common charge was 5 percent for a six-month loan. There was also an upfront financial transactions tax of 0. 125 percent per month on principal plus interest. Therefore, in order to obtain 100 cruzeiros, for example, one would have to borrow approximately 106 cruzeiros. Albuquerque's assistant calculated this as follows:
From this, the effective loan rate, before indexing, could be calculated by figuring that for each Cr$100 obtained, Morris would have to pay the 9.54 percent interest rate on Cr $106.18. This effective interest charge, plus the ORTN monetary correction, would be fully deductible in computing profits subject to Brazilian corporate taxes.
However, because of current tight local credit conditions, Morris might have to use a large number of banks, perhaps ten, to meet its working capital needs in full.
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