Tony/Steve, you all have to pay to do this? I am not sure that they have billed me yet... probably gonna kick me off, I have left so many emails for them with comments/suggestions...
This or the equivalent may exist in another post but here goes as I am too braindead to conclude: (read the whole thing before you decide that you have seen this before... awkward but interesting commentary.
SMRA Latin America Take 2
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Yesterday, in an interview to O Globo, the governor of Rio de Janeiro, Anthony Garotinho (PDT), said that his state will not default in payments of its outstanding
debt with the federal government, which totals R$21.3 bln. This is a clear sign that it is unlikely that Minas
Gerais moratorium revolt will have a significant impact on the fiscal front, since no other states will follow its lead. President Cardoso, moving to isolate Minas
governor, Itamar Franco, bashed the moratorium and called the governor irresponsible.
Rio de Janeiro's stand was key to assess the impact of Minas moratorium. Rio's debt is far larger than Mina's R$18 bln, and is governed by a politician belonging
to an opposition party, while Minas' governor's party, the PMDB, belongs to the coalition. Rio's finances are also in a worse shape than Minas, so if any, Rio
should be the one defaulting. If Rio does not follow, this means that the chances of other joining Itamar Franco to pressure the federal government are almost nil,
and the chances that, when the moment comes, Minas honors its obligations, are increased.
The moratorium announced by the Brazilian state of Minas Gerais, the third most populous and third richest in Brazil, is likely to wind up being one of the most
famous acts of political bluffing. We believe it is very possible that, when the moment comes, on Jan 20th, for Minas to pay, the state will honor its obligations.
The reason is simple: Minas Gerais has could lose more in resources being retained by the federal government in retaliation for the default, than the money it could
save by not paying its debt. And even if it doesn't happen, the treasury is certain to pay the dues.
The consequences of this action are difficult to assess, but they're not small. No other governors are likely to follow, but this action can make of Itamar a hero, or
a villain, depending on how the situation evolves. But a lot will depend not on him, but on the stance taken by other governors.
The government has reacted to Minas Gerais' challenge and to other possible states' moratorium by retaining federal transfers from the Fundo de Participacao dos
Estados, a special federal fund for the states.
The government can also ask the judicial power for authorization to retain all the proceeds from the ICMS tax collected by the states, in case of a moratorium,
and use it to pay off maturing obligations. This is the weak point of Itamar Franco's strategy. Trying to save money by not paying Minas debt could mean in
revenue losses that far outweigh the moratorium savings. Put together, the revenues for Minas Gerais coming from the ICMS tax (about R$450 mln per month),
and the federal transfers (R$35 mln monthly), far exceed the R$60 mln monthly debt service by the state to the federal treasury.
In game theory, this is what is called not subgame-perfect strategies, or put it another way, the threat is not believable. It would cost more, in dollar and cents, to
Itamar to implement its moratorium than to honor his obligations. Itamar can fight back and legally try to keep the ICMS resources at home, but this would be a
long, costly battle. In the meantime, the treasury has instructed Banco do Brasil to set up a special provision in case Minas Gerais makes its declaration of moratorium effective, and does not pay its obligation on January 20th. |
