Rio Warns of Fiscal Collapse as Brazil States Seek Debt Relief

  • States ask to pay simple rather than compound interest on debt
  • Supreme Court will rule on repayment method next week

Rio de Janeiro said it’s running out of money to pay for basic services months before the Olympic Games while other Brazilian states warned of similar financial crises if the federal government doesn’t provide debt relief.

Six state governors and a representative for Rio de Janeiro said on Tuesday their fiscal woes are forcing them to make cutbacks that could lead to a breakdown of social services. Rio has been delaying payment of salaries to public servants since the beginning of the year.

The states argued before the Supreme Court on Tuesday that the situation has become so dire that they should be allowed to pay simple rather than compound interest on debts owed to the federal government. The court will rule on the matter April 27, Justice Luiz Edson Fachin said. The change would cost the Treasury 313 billion reais ($88 billion) in lost revenue, according to the Finance Ministry.

Brazil’s state debt crisis is deepening as the country faces its worst political crisis in decades and austerity measures are put on hold. The high court’s decision will have a profound impact on the finances of both state and federal governments as tax revenues plunge amid the worst recession in decades.

Olympic Games

Rio de Janeiro Chief of Staff Leonardo Espindola warned that the crisis comes as the state prepares to host the Olympic Games in August, possibly making it difficult to carry out basic functions such as fueling police cars and maintaining hospitals.

“We’re talking about the image of the country,” he said. “We are nearing a social collapse in our state.”

Finance Minister Nelson Barbosa argued before the Supreme Court that the federal government also pays compound interest on its debt, and that changing that calculation would spark legal uncertainty.

“The governors’ demand reflects an immediate problem that needs to be dealt with, but it’s the wrong solution,” Barbosa said, adding that the way out of the crisis is to renegotiate and extend debt maturities.

Santa Catarina got a Supreme Court injunction earlier this month in favor of changing the interest calculation, encouraging other states to demand the same. Governors from Sao Paulo, Minas Gerais, Rio Grande do Sul, Santa Catarina, Mato Grosso do Sul, and Alagoas were received in the Supreme Court on Tuesday.

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