(FORTUNE Magazine) – When Treasury Secretary James Baker proposed solving the foreign debt crisis by sending debtor nations new loans in return for austerity measures, he was too late; it was clear that banks would eventually have to swallow hard and write down the loans (FORTUNE, December 23, 1985). Citicorp moved in that direction in March when it said that $3.9 billion of $4.6 billion in loans to Brazil may have to be considered nonperforming. That would cost Citicorp $50 million of profits in the first quarter of 1987 and $190 million for the year (in 1986 Citicorp earned $1.1 billion). Following Citicorp's disclosure, Continental Illinois Corp. said it will probably reclassify $380 million of its Brazilian loans as nonperforming, decreasing earnings by $10 million in the first quarter and $35 million for the year (it earned $165.2 million last year). A decision on how to treat the loans depends on the outcome of Brazil's negotiations to restructure its foreign debt. Should Citicorp and Continental Illinois reclassify Brazilian loans, other commercial banks would likely follow.