Brazil Markets Reel as Govt, States Clash Over Debt (Update3)
Brazil Markets Reel as Govt, States Clash Over Debt (Update3)
(Rewrites first two paragraphs.)
Brasilia, Brazil, Jan. 11 (Bloomberg) -- Brazilian markets
reeled as the federal government cut off aid to a state that
suspended debt payments, threatening the same retaliation against
other regions seeking to renegotiate billions of dollars of
obligations to Brasilia.
The escalating conflict among Brazil's cash-strapped
governments makes it tougher for the federal government to narrow
its projected $64 billion deficit and reduce interest rates that
topped 32 percent.
''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 Latin American sovereign debt ratings at
Standard & Poor's Corp., in a statement.
The benchmark Bovespa stock index slid 5.8 percent to its
lowest since Oct. 8. The yield on the ''C'' bond, the most widely
traded emerging market security, jumped to 17.1 percent, the
highest since Sept. 14 as traders said they increased ''short
sales'' -- betting the bonds would extend their decline.
The federal government withheld a 11.7 million reais ($9.8
million) transfer to the state of Minas Gerais due yesterday. The
move sought to punish the nation's second-most populous state,
which last week suspended payments on its $15 billion of debt for
90 days.
Relief
Officials from at least two more states -- Rio Grande do Sul
and Goias -- said they'd seek debt relief in Brasilia this week.
Compounding investor concerns, Minas Gerais has a $100
million Eurobond maturing next month. The federal government has
guaranteed the bond, though the state has sent mixed signals over
its desire or ability to pay it.
Vice Governor Newton Cardoso today said that bonds will be
repaid, Gazeta Mercantil newswire reported. The decision was
announced after Gov. Itamar Franco met with officials from Paris-
based Banque Indosuez, the lead managers of the 1994 bond sale.
While no other states have followed the lead set by Minas
Gerais, the debt moratorium has kicked off a movement by several
states to seek easier terms on debt accords. Finances are being
squeezed as the economy teeters into recession.
Several states claim that that have no money to pay the 100
billion reais ($83 billion) owed the government. Together, the
states' pay about 749 million reais a month to service it.
If the central government withholds all the money due to
Minas Gerais this month -- 81 million reais -- the state will be
a net loser, as it stands to receive more from the central
government than it would pay in debt payments, which are 77
million reais.
Talks
''The way things stand, the federal government is trampling
all over the states,'' said Gov. Olivio Dutra of Rio Grande do
Sul, who sent his finance secretary to Brasilia today to talk
with Finance Ministry officials to review debt terms.
States had agreed to pay between 11.5 and 15 percent of
monthly revenue to federal government and now they want that
revised down.
''The debt agreement is valid and terms have to be met,''
said Eduardo Guimaraes, secretary of the national treasury in
Brasilia.
The soybean-producing state for Goias for example, agreed to
pay 14 percent of its revenue, or some 21 million reais a month,
to settle its 8 billion reais debt over 30 years.
Goias' governor, Marconi Terillo, will meet with Finance
Minister Pedro Malan later today to ask him to bring down
payments to 11 percent of the state's revenue, said a state
spokesman.
The states of Acre, Rio de Janeiro and Mato Grosso do Sul
are also queuing up to meet with finance ministry officials to
review terms.
''The states have legitimate claim,'' said Raul Velloso, an
economic consultant in Brasilia and specialist in public
finances.
Bloated
Although most of Brazil's 27 states have bloated payrolls
that consume on average 60 percent of their revenue, Brazilian
law does not allow them to easily layoff workers, said Velloso.
The government must reduce the size of monthly payments on
their debt and induce states to raise revenue by introducing
higher taxes on state workers and collecting money from state
retirees, he said.
The state governors who want easier terms plan to meet in
Minas Gerais with finance ministry officials on Jan. 18 to
discuss the debt.
Still, the federal government has got support among many
governors. Tomorrow, the governor of the northeastern state of
Maranhao, Roseana Sarney, plans to meet with governors of 14
other states to declare their support for the federal government.
In addition, Sao Paulo, Brazil's most populous state which
owes the federal government about 50 billion reais, said it plans
to meet all terms of its debt agreement.
''Sao Paulo will never turn its back on Brazil,'' said Gov.
Mario Covas during his inaugural speech yesterday.
The states pay about percent to 6 percent interest on the
debt, well down from benchmark rates of 29 percent and the 45
percent rate for a car loan.
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