Brazil States' Debt Threats Send Markets Reeling (Update3)
Brazil States' Debt Threats Send Markets Reeling (Update3)
(Adds possibility of more debt payment delays.)
Thu, 7 Jan 1999, 5:09pm EDT
Brasilia, Brazil, Jan. 7 (Bloomberg) -- The threat by two of
Brazil's biggest states to delay debt payments to the federal
government sent the country's financial markets reeling. Bonds
posted their biggest decline in more than three months.
The threats by Minas Gerais and Rio Grande do Sul
highlighted the country's rotting finances, rattling investors.
The federal government's own budget deficit and the possibility
of a currency devaluation forced the International Monetary Fund
to arrange $41.5 billion in emergency loans last November.
''The view of investors is that Brazil has one shot to get
it right, given that they have the IMF package in place,'' said
Vinod Sehgal, a managing director at SG Cowen Securities. ''To
date, they have not inspired confidence.''
Brazil's benchmark stock index fell 6.1 percent to 6,884.
Its benchmark ''C'' bond plunged up to 5 percent, its biggest one-
day fall since Sept. 17, driving the yield to 16.6 percent.
A Minas Gerais spokesman said the state was so short of cash
it would seek to renegotiate all its debts, casting doubt on its
ability to repay $100 million of Eurobonds maturing Feb. 10.
Allies Eyed
Reports that Minas Gerais Gov. Itamar Franco, who took
office five days ago, was rallying other governors to join in the
moratorium, raised the stakes for the central government, which
is trying to win back investor confidence and narrow a projected
$64 billion budget deficit.
An IMF spokesman in Washington declined to comment.
Federal officials threatened to withhold funds from Minas
Gerais, the second-biggest of 27 states, which yesterday said
it's out of cash and would stop payments for at least three
months on its 18.5 billion reais ($15.3 billion) debt to
Brasilia.
The governor of Rio Grande do Sul, which owes 17 billion
reais to the federal government, said it will delay payment on
this year's first installment of its debt -- about 64 million
reais due on Jan. 15.
Federally controlled Banco do Brasil SA was then authorized
to withhold a 60 million reais transfer of federal funds to Minas
Gerais scheduled for Jan. 20, said Paulo Zaghen, a director at
the central bank.
Under a debt accord signed last year by former Gov. Eduardo
Azeredo, the state pledged to pay about 12.5 percent of its
monthly revenue to the central government. That's about 80
million reais a month. It's paying a below-market interest rate
of 7.5 percent.
The states' cash-flow problems -- like those of the federal
government -- stem from the cost of sustaining massive
bureaucracies and a growing cadre of pensioners who don't pay
taxes.
Minas Gerais, which has 16 million people and accounts for
13 percent of the country's $800 billion gross domestic product,
spends over 80 percent of its 480 million reais monthly tax
revenue to pay 450,000 state workers and retirees.
Tactics
Analysts have said Franco and the other governors have
threatened to withhold debt payments as a bargaining tactic to
win better payment terms with the federal government.
Spokesmen for Sao Paulo, the country's biggest state,
declined to comment on following the other states in holding up
part of the 3 billion reais it owes the federal government this
year in interest payments.
The governors of Minas Gerais, nestled between Sao Paulo and
Rio de Janeiro; Rio Grande do Sul, the country's southern-most
state; and four other states ruled by opposition parties have
asked for a meeting on Jan. 18 with President Fernando Henrique
Cardoso and Finance Ministry officials to try and review the debt
accords.
In the past four years, the federal government assumed the
debts of 24 states to reduce the country's growing budget
deficit. The states' debt amounted to more than 100 billion reais
in 1997.
The states pledged to sell assets, including banks and
utilities, and pay back the federal government in 30 years at 6
percent interest a year. This compares with about 29 percent that
the federal government pays in interest on its debt.
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