Brazil State Declares Moratorium on $15 Billion Debt (Update3)
Brazil State Declares Moratorium on $15 Billion Debt (Update3)
(Updates with more detail, rewrites)
Thu, 7 Jan 1999, 4:29am EDT
Brasilia, Brazil, Jan. 6 (Bloomberg) -- Brazil's second
largest state said it ran out of cash and won't make payments for
at least three months on the 18.5 billion reais ($15.3 billion)
of debt it owes the central government.
The move by Minas Gerais state prompted Brazilian securities
to plunge, rattling investors already skittish that a slumping
economy will make it tougher for the government to close its
budget deficit and support its currency.
The unexpected moratorium could also set back Brazilian
efforts to borrow abroad.
''There will be a lot more of this to come and it obviously
isn't good news,'' said David Roberts, head of emerging market
bond research at Nationsbanc Montgomery Securities in New York.
''Brazil is in an extremely difficult situation. They are being
asked to raise taxes in the midst of a severe recession.''
Brazil's benchmark ''C'' bond tumbled to 60.19 from as high
as 62.35, driving its yield to 15.9 percent. Shares in
Telecomunicacoes Brasileiras SA plunged 3 to 78 in New York after
the announcement. Trading in Brazil was closed when the statement
was made.
''Due to an absolute lack of money we will not meet the debt
accord signed by the previous government,'' said Minas Gerais
Gov. Itamar Franco, who took office five days ago.
Debt Agreement
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.
Franco, who was president of Brazil from 1992 to 1994, said
the state didn't have enough money to pay salaries and spend on
health programs. Falling revenue because of an economic slowdown
and payment of debt installments to the federal government
emptied the state's coffers, he said.
''This really has taken everyone by surprise because we were
expecting (the two sides) to reach agreement on renegotiating the
debt,'' said Jaime Alves, an economist at Banco Patente SA in Sao
Paulo.
If Minas Gerais doesn't pay its debt, the central
government's revenue could fall, threatening the country's
efforts to cut by almost half its $64 billion budget deficit this
year. The states account for more than half of the country's
budget shortfall.
A moratorium by Minas Gerais also raises concern that other
states governed by opposition parties could also refuse to pay.
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.
Possible Government Retaliation
Finance Minister Pedro Malan has said the states must make
the payments or will face retaliatory action, including cuts in
transfer payments and tax revenue from the national government.
''We will not renegotiate what has already been
renegotiated,'' said Pedro Parente, the executive secretary at
the Finance Ministry.
Nationsbanc's Roberts said he expects Minas Gerais to reach
a compromise with the federal government to avoid defaulting on
its debt.
''Minas Gerais has a signed agreement with the federal
government,'' Roberts said. ''It is not something that can just
be waived away. There are tools to collect this by withholding
funds.''
The moratorium could make it harder for companies to sell
debt abroad, as it increases the risk of investing in Brazil.
Minas Gerais has $100 million in five-year bonds maturing Feb. 10
and a further $100 million coming due next year.
The state has already earmarked money to redeem bonds coming
due next year, a spokesman for Minas Gerais said.
Rio Grande do Sul, which owes 17 billion reais to the
federal government, also said today it will delay payment on this
year's first installment of its debt -- about 64 million reais
due on Jan. 15.
''Since we inherited a budget deficit of 1.2 billion reais
from the previous government and we spend 70 percent of revenue
on salaries and payrolls, that leaves us nothing,'' said a
spokesman for Rio Grande do Sul.
Cardoso Meeting
The governors of Minas Gerais, Rio Grande do Sul 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.
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.
In the past four years, the federal government assumed the
debts of 24 of the country's 27 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.
--------------------------------------------------------------------------------
© Copyright 1998, Bloomberg L.P. All Rights Reserved.
latinvestor.com |
