Temer Gives Brazil States Billions of Relief on Debt Payment

  • States given grace period, must gradually increase payments
  • States owe the federal government about 427 billion reais

Brazil’s government says it struck a deal with state treasuries that’s designed to alleviate their fiscal crises without placing too much of a burden on federal coffers.

The deal on the 427 billion reais ($126 billion) that states owe the federal government was reached in a meeting between Acting President Michel Temer and governors on Monday. It will cost the federal government 20 billion reais in lost revenue this year and 15 billion reais in the two subsequent years, Finance Minister Henrique Meirelles said. The cost for 2016 is included in this year’s budget projections, he added.

According to the terms of the deal, states will receive a discount on their debt payments to the federal government for 24 months. For the first six months they will make no payments at all.

"It’s a figure that’s smaller than what the states proposed," Meirelles told reporters after the meeting with governors. "What’s important is that the interests of the nation prevailed."

Temer’s economic team is trying to shrink a near-record budget deficit that has cost Brazil its investment-grade credit rating and has eroded investor sentiment. Meirelles has proposed a series of measures to shore up fiscal accounts, such as a cap on federal spending rates.

For a detailed look at Brazil’s economic woes, click here.

Pressure to reach a deal with governors intensified last week when Rio de Janeiro declared a state of emergency just as it gears up to host the Summer Olympics, cautioning of a "total collapse of public security" if it didn’t receive financial assistance soon. Temer’s administration pledged emergency funds, with his top aide saying the government had to help to protect the country’s image during the Games. Negotiations on possible aid for Rio are ongoing, Meirelles said.

Deal’s Risk

As part of the deal, the government will ask Congress to authorize legislation that would cap spending at the state level. The agreement comes after the federal and state governments spent months negotiating terms of the debt repayments.

"It could have been worse for the federal government," said Marco Maciel, Bloomberg Intelligence’s economist in Brazil. "But the risk is that the states don’t deliver the spending caps that were agreed on."

The deal closed on Monday should also end a dispute over interest payments pending before the Supreme Court. States had asked the court to allow them to repay the obligations using simple rather than compound interest rates. The federal government said that would have placed too much of a burden on its budget. The country’s top court delayed its decision earlier this year to give both sides more time to negotiate.

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