Brazil's Top Court Delays Ruling in $114 Billion State Debt Case

Brazil’s Supreme Court delayed a decision on whether 11 states can reduce their debts to the federal government, a ruling that could deal another blow to the nation’s shaky public finances.

The nation’s highest court voted Wednesday to delay for 60 days a ruling on whether Minas Gerais, Rio Grande do Sul, Santa Catarina and other states may re-calculate their debts to the federal government using simple rather than compound interest rates. The Finance Ministry has said that would enable other debtor states to get the same treatment, thereby shrinking revenue by 402 billion reais ($114 billion).

Brazil’s government can ill afford to cover a shortfall that large. Tax receipts are faltering as the country heads into the second year of recession and it is running a near record-high budget deficit. The fiscal deterioration has already cost Brazil its investment-grade seal of approval from three major credit rating agencies.

The decision to delay comes amid a swirling political crisis that could temporarily force President Dilma Rousseff out of office by mid-May. She would be replaced by Vice President Michel Temer.

“There’s a political element to that decision,” according to Joao Augusto de Castro Neves, an analyst at political risk consultancy Eurasia Group. “It buys time for a transition of the federal government and allows for Temer to have a bit of time to negotiate something with the states.”

Brazil’s budget deficit has more than tripled in two years to 10.8 percent of gross domestic product, and its gross debt jumped to 67.6 percent of GDP from 51.7 percent at the end of 2013. Economic measures to improve government finances have been pushed to the back burner in Congress by the ongoing impeachment process.

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