Brazil's Minas Gerais State Declares 90-Day Moratorium
Dow Jones Newswires
SAO PAULO -- Brazil's Minas Gerais state followed through on an earlier threat Wednesday and declared a 90-day moratorium on debt payments to the federal government.
In a written statement, new state Governor Itamar Franco, a former Brazilian president, said the decision had to be taken because of an "absolute lack of money."
Minas Gerais was the first of several states in recent days to hint that debt terms needed to be restructured.
The 90-day suspension of payments by Minas Gerais, the country's third wealthiest state, is valid from Jan. 1, the statement said.
With the decision, Itamar Franco is breaking an agreement signed between the preceding Minas Gerais state administration and the federal government in 1997 to roll over debts worth $15 billion over 30 years, at highly subsidized interest rates.
Similar agreements were signed with 24 others of Brazil's 27 state governments, in a broad round of negotiations.
Under the accord Minas Gerais had been paying between 11% and 13% of its revenues monthly to the federal government, or $67 million.
Later, presidential spokesman Sergio Amaral said President Fernando Henrique Cardoso feels that the decision will affect "the fiscal stability plan, states' accounts and unemployment."
He also said the decision by Itamar Franco will lead to a delay in lowering interest rates.
Amaral added that the government already renegotiated states' debts "several times in the past - and always kept its commitments."
The spokesman added that if states don't pay their debts to the federal government, "this will result in penalties."
The government has steadfastly denied in recent days that states would have their debt payments rescheduled again.
If the penalties included in the debt rollover contracts are taken seriously, Minas Gerais will end up facing costly consequences.
The contracts say that debt servicing costs for states defaulting on monthly payments to the federal government will rise sharply - from the current 6% to 29% a month.
Recalcitrant states will also lose their share in federal tax revenues and the federal government will be allowed to draw funds from the dedicated ICMS state tax.
-By Adriana Arai, Steve Wisnefski and William Vanvolsen; 55-11 813-1988
Later, the Finance Ministry issued a communique showing how advantageous the debt renegotiation accords were for all states in general and for Minas Gerais state in particular.
The ministry said the agreement saved Minas Gerais coffers 380 million reals (BRR) ($1=BRR1.20) in 1998 alone and that the state's total debt was cut BRR3.9 billion. Both advantages were due to subsidized interest rates offered by the federal government in the accord.
The Finance Ministry also said that all debt rollover agreements, after being "exhaustively negotiated for months," have been approved by respective state assemblies and by the federal Senate.
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