Brazil state's debt moratorium may hurt rating-S&P
Reuters, Friday, January 08, 1999 at 15:32
( PRESS RELEASE PROVIDED BY STANDARD & POOR'S )
NEW YORK, Jan 8 - The declaration on Jan. 6, 1999 of a
debt moratorium by the governor of Minas Gerais, Brazil's third
largest state, will test both Brasilia's political skill and
the strength of its commitment to the fiscal austerity package
now in place, Standard & Poor's Ratings Services said today.
Depending on the federal government's response, the
moratorium could have the potential to further delay Brazil's
prospects for achieving financial recovery and jeopardize its
credit standing, the global ratings service said.
Currently, Brazil's long-term foreign currency debt is
rated double-'B'-minus with a negative outlook, while its
long-term local currency debt is rated double-'B'-plus, also
with a negative outlook.
"Given its own precarious financial condition, the federal
government can ill afford to increase its subsidy to the states
by granting still more concessional terms," said Lacey
Gallagher, director of Standard & Poor's Sovereign Ratings
group's Latin America region.
"Moreover, such a move would aggravate the moral hazard
already pervasive in states' financial behavior," Ms.
Gallagher added.
Bailouts of varying formats over the years have contributed
to the extreme fiscal irresponsibility of many states, Ms.
Gallagher added. "The states' deficit accounts for about half
of the public sector deficit.
The government will be challenged to both protect its debt
agreements with the states and to maintain congressional
support for measures now under discussion in Congress.
Most important among these is the CPMF (financial
transactions) tax, a critical and delayed component of the
fiscal austerity package.
Setbacks on either of the debt agreements or the fiscal
measures would further delay Brazil's prospects for achieving
financial recovery and jeopardize its credit standing," Ms.
Gallagher said.
Although the coverage of the moratorium is as yet vague,
its main target is Minas Gerais' R18.5 billion debt to the
federal government, the result of a debt swap program between
the federal government and state governments.
Under the terms of that program, the federal government
extended extremely concessional loans to Minas Gerais and 23
other states to repay bonds and other obligations that they had
been unable to refinance through other means during the last
several years.
In return, the states agreed to a series of financial
targets involving reduction in payroll expenditures to 60% of
total revenues, deficit reduction, improvements in tax
compliance, privatizations, and the like.
As collateral for the loans, the federal government has the
legal right to withhold from the states constitutionally
mandated transfers of income and industrial production taxes.
The debt agreements were ratified by State Assemblies and are
binding under both state and federal law.
Monthly transfers of the specified taxes to Minas Gerais
from the Federal Government are estimated at about R95 million,
compared with monthly amortization payments due of about R80
million.
As such, from a legal and financial perspective, it is
clear that the Federal Government is fully covered. Indeed,
this is the case in most states, i.e., the value of the tax
transfer collateral exceeds the value of the amortization
payments.
The moratorium declaration is a political tactic designed
to extract concessions from the Federal Government. However,
should the government choose to renegotiate its deal with
Minas Gerais, the credibility of its agreements with the 23
other states would be at stake.
Minas Gerais also has a $100 million Eurobond (not rated by
S&P) maturing Feb. 10, 1999. It has so far been left vague as
to whether this bond will be included in the moratorium, and it
may well be excluded.
The state had previously deposited $78.3 million into an
escrow account with the federal government to pay the maturing
bond and an $8 million payment due the same day on another
bond, for a total of $108 million.
Again, the potential default and its multiple consequences
raises the issue of moral hazard. Clearly the federal
government would be loathe to see a Brazilian state default to
external bondholders, given the blow to short-term investor
confidence that this would entail.
However, federal financial support would only weaken the
states' fiscal discipline further.
It would also add a sizable contingent liability -- the
states' outstanding debt -- to the federal government's
balance sheet without any increase in revenues, since the
states are still constitutionally entitled to tax transfers
independent of any discretionary support on the part of the
federal government.
As such, the federal government's credit standing would be
weakened by any extraordinary financial support to the state,
Standard & Poor's said.
Copyright 1999, Reuters News Service
|
