Brazil Congress to Vote on Pension Tax to Slash Growing Budget Deficit
Brazil Congress to Vote on Tax to Cut Budget Gap (Update4)
(Adds Greenspan comment.)
Brasilia, Brazil, Jan. 20 (Bloomberg) -- Brazil's gamble
that last week's currency devaluation will help revive the
slumping economy faces a critical test today when Congress
considers a new tax on retired civil servants.
Stocks rose on optimism the lower house of Congress will
pass the deficit-cutting measure it defeated four times the past
year, rather than risk triggering a burst of capital flight and
the cut-off of international aid. The benchmark Bovespa index
rose for the fourth day, gaining 3.9 percent in early trade.
''If Brazil can't get legislation through in times of
crisis, when can it?'' said Paul McNamara, an emerging market
strategist at Julius Baer Investment Management, which invests a
small proportion of its $5 billion global bond portfolio in
emerging markets. ''A lot hinges on today's vote.''
The tax, aiming to raise 3.1 billion reais ($2 billion) this
year, is vital to convincing skeptical lenders the government can
narrow its 73 billion reais budget deficit and reduce interest
rates. The pension system has become a symbol of Brazil's failure
to live within its means.
Debt
''Follow through in reducing budget imbalances and in
containing the effects on inflation of the drop in value of the
currency will be needed to bolster confidence and to limit the
potential for contagion to the financial markets and economies of
Brazil's important trading partners,'' said U.S. Federal Reserve
Chairman Alan Greenspan in Congressional testimony today.
In New York, Finance Minister Pedro Malan met with senior
investment bankers, financier George Soros and Federal Reserve
Gov. William McDonough at the New York Federal Reserve Bank to
shore up support for the government efforts, wire service reports
said.
Bankers attending included Jon Corzine, co-chairman of
Goldman Sachs & Co; David Komansky, chief executive officer of
Merrill Lynch & Co; and Henrique de Campos Meirelles, president
of BankBoston Corp.
A jump in interest rates and a 22 percent decline in the
currency's value against the dollar the past week won't keep the
government from repaying its 320 billion reais of domestic debt,
Malan said, countering speculation of a debt rescheduling,
according to the reports.
The currency was steady, at 1.575 reais to the dollar, from
1.56. Malan declined to comment on the real's value.
Vote
He also expressed confidence that while lawmakers defeated a
similar pension bill last month, they'd pass it now. A
preliminary vote is scheduled for about 11 a.m. New York time and
final vote likely in the evening.
The currency devaluation has raised the stakes for
legislators typically focused on local issues.
''Before, the defeats were only the government's,'' said
Deflim Netto, a deputy who previously voted against the tax.
''Now a defeat could hurt the whole country.''
The taxes are part of 28 billion reais in deficit cuts
proposed last year as condition for a $41.5 billion aid package
arranged by the International Monetary Fund.
''This vote is fundamental,'' for the market, said Alexandre
Mendes, who manages $10 million in equities at Banco Patente SA
in Sao Paulo. ''I think the government is really confident it can
win this time.''
The government, which controls both houses of congress,
failed late Tuesday to muster enough votes needed to put the
pension bill on the agenda for today, and will try again this
morning. If passed by the house, it will move to the Senate for
final passage.
Rising Rates
The vote comes as Brazil struggles to cut its budget deficit
amid rising interest rates and a weaker currency. The Brazilian
central bank boosted overnight interbank rates to 32.5 percent
from 32 percent.
Capital outflows have averaged more than $500 million a day
this month, sapping reserves -- more than $70 billion last summer
-- by more than $6 billion to about $30 billion.
Brazil's failure to overhaul its cash-strapped pension
system has become symbolic of its inability to narrow its
deficit.
''The government hasn't the money to meet its obligations
with pensioners,'' said Communications Minister Pimenta da Veiga
in television interview this morning. '' I don't want to think
about a defeat today.''
The pension tax was to have been reconsidered in February
when a new slate of lawmakers takes over. The recent currency
devaluation and spike in interest rates pushed up the schedule.
''If the government manages to get approval, it would be a
very positive signal of its political power within congress''
said Fernando Ferreira, treasury manager at Placas do Parana, a
construction materials maker. ''It wouldn't just be for the
fiscal aspect but also a it would be very symbolic.''
Although the government has the support of more than three
quarter of the lawmakers in the house, congressmen didn't vote
for the bill because many are retired state workers or have
family members who are.
The bill could tax retirees for the first time. Pensioners
earning between 600 reais and 2,500 reais monthly would be taxed
at a rate of 11 percent to 25 percent. It would also increase to
25 percent, from 11 percent, the income tax rate for current
state workers.
While Brazil collects about 3 billion reais in taxes from
520,000 state workers, it spends about 22 billion reais paying
pension to about 900,000 retired workers.
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