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Burying the Legal Ghosts of Brazil’s Hyperinflation

SÃO PAULO – A decades-old legal fight between consumers and financial institutions over the impact of Brazil’s economic policies of the 1980s and 1990s is nearing conclusion. In December, lawyers representing claimants presented Brazil’s Supreme Federal Court with a request to ratify a settlement reached with the banks.

If the court approves the deal, the settlement would put billions of reals into the pockets of savers. But more than a long-awaited payday for some one million claimants, the court-ordered restitution would also mark an official end to Brazil’s seemingly endless war on hyperinflation.

During the late 1980s and early 1990s, the Brazilian government struggled to stabilize the country’s economy and currency. At the height of the crisis, annual inflation reached 2,477%; at that rate, prices for food and household goods increased daily. A string of unsuccessful policies had accelerated inflation in public and private contracts, affecting wages, rents, and bank deposits. Some highly controversial measures – such as a move in 1990 to commandeer deposits – briefly halted inflation but contributed to a deep recession.

The implementation in 1994 of Plano Real (“The Real Plan”) brought some relief, by introducing a set of stabilization measures that created the current currency. But these were also troubled times for Brazil politically, as the country was still consolidating its transition to democracy after 20 years of military dictatorship. Hyperinflation and its social consequences amounted to an economic gauntlet for Brazil’s new leaders, and rising inequality posed a severe threat to the country’s democratic hopes.

Although politicians eventually navigated the currency crisis, the economic tensions never really vanished, even after the 1994 plan took hold. Many of the failed monetary measures cost people significant savings; as a result, nearly every stabilization plan from that period was litigated, including the successful Plano Real. Lawsuits in that case are still pending at the Supreme Court.

Many in Brazil, especially central bankers, have warned that continued litigation of past monetary policies could result in a breakdown of the current financial system, leading to new levels of economic dysfunction, such as insufficient credit.

That possibility seems to have had a sobering effect on the country’s top court. Historically, the Supreme Court has sided with consumers in cases related to inflation adjustments on savings deposits. But the justices have also tempered their decisions in cases with sweeping economic implications. And, in the case of the lawsuits implicating economic policy, no final decision has been reached, despite their being on the docket for years. That is why the settlement reached in December – which was ratified by the attorney general – could be interpreted as giving the court a way out.

Full details of the settlement have not been disclosed. But it seems increasingly clear that after nearly three decades of legal wrangling, consumers and financial institutions have agreed that a negotiated approach is the only way forward.

As a result, whatever the final tally, banks will likely get off easier than authorities had feared. According to reports, the final settlement will be in the vicinity of R$12 billion ($3.8 billion), a far cry from a previous central bank estimate of R$150 billion, or the R$341 billion predicted by Febraban, the Brazilian Federation of Banks.

If this long legal journey does indeed end this year, updates to the Brazilian Code of Civil Procedure will deserve much of the credit. Changes implemented in March 2016 encourage litigants to pursue mediation and arbitration, a move meant to reduce the tens of millions of civil lawsuits that are currently clogging the courts. These revisions could also help other old legal cases move toward conclusion.

An approved settlement would mark the end of a complex and divisive legal fight that for too long has prevented Brazil’s leaders from putting a legacy of failed economic initiatives behind them. That would be welcome news for Brazil’s consumers, financial institutions, and overall economic health.

Camila Villard Duran is a professor of law at the University of São Paulo, and a former Oxford-Princeton Global Leaders Fellow at the Woodrow Wilson School of Public and International Affairs. Arnoldo Wald is a professor of law at Rio de Janeiro State University.

By Camila Villard Duran and Arnoldo Wald

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