NY Times. Brazil's Economic Crisis Pits President Against Governors
January 25, 1999
By LARRY ROHTER
RASILIA, Brazil -- As the Brazilian government struggles to
restore the stability of an economy under siege, the most
intractable critics have emerged not abroad, but here at home, where
the resistance to reform by a group of powerful state governors has
created a dangerous impasse.
The crisis that has shaken world stock markets, led to a draining of
Brazil's foreign reserves and forced a 35 percent devaluation of its
currency was touched off on Jan. 6. That was when Itamar Franco, the
newly inaugurated governor of Brazil's second-most-populous state,
Minas Gerais, announced a unilateral 90-day moratorium on repayment
of his state's estimated $13.5 billion debt to the federal government.
None of Brazil's 26 other states has yet made the same threat explicitly.
But six other opposition party governors joined Franco last week in
Belo Horizonte, his state capital, for a strategy session.
The result was a mutual declaration condemning the belt-tightening
policies of the federal government in Brasilia as "cruel and unjust" and
calling on President Fernando Henrique Cardoso to open talks with
them by Feb. 5 to renegotiate their outstanding debt.
The group included not only Franco but the governors of the country's
third and fourth most-economically-important states, Anthony
Garotinho of Rio de Janeiro and Olivio Dutra of Rio Grande do Sul.
Unless Cardoso agrees to their demands, their statement warned, it will
immediately become "absolutely impossible to pay the refinancing
allotments of the states."
When Cardoso took office four years ago this month, the total internal
debt owed by federal, state and municipal governments was equivalent
to 29 percent of Brazil's gross domestic product, or just over $120
billion at the exchange rate that prevailed at the time. By the start of this
year, that figure had risen to 41 percent of gross domestic product, or
$320 billion, nearly one-third of which is owed by states.
The debt figure has soared because states and cities largely finance their
deficits by borrowing from federal banks and, through constant lobbying
and political horse-trading, they have been able to roll over most of their
loans on favorable terms. But as interest rates in Brazil have
skyrocketed to nearly 50 percent in recent months as part of an effort
to prevent a run on the national currency, those debts have reached
unmanageable levels.
"If I have to choose between paying civil servants and paying the federal
government, I'm going to pay the civil servants," Garotinho warned last
week. He added that by March his state, which owes $14.5 billion and
includes the city of Rio de Janeiro, will not have enough money on hand
to meet all of its obligations. "Rio's situation is dramatic," he said.
The stalemate between Cardoso and the defiant governors has
reverberated throughout Latin America, where any challenge to
centralized power is always viewed nervously. Without mentioning
Franco by name, President Ernesto Zedillo of Mexico warned two
weeks ago that the stability of the entire region has been put at risk
because of the irresponsible actions of a single politician with
discredited populist notions.
Franco's response did nothing to solidify relations between Latin
America's two most populous countries. He huffily described the
Mexican government as corrupt and said that Zedillo would be better
off devoting his attention to the long-running rebellion in the state of
Chiapas and more thoroughly investigating the scandals surrounding the
administration of his predecessor, Carlos Salinas de Gortari.
A former president himself, Franco had become a national
laughingstock by the time he left office four years ago. Political
commentators and comedians alike have continually poked fun at the
wigs he wears, his irascibility, his jealousy of Cardoso, a former protege
who served as his Finance and Foreign Minister, and his penchant for
quixotic romantic pursuits of much younger women.
But with the opposition rudderless after Cardoso, in October, became
the first Brazilian president to be elected to a second consecutive term,
Franco sensed a vacuum, news commentators and other political
analysts said, and he moved to fill it. His ultimate object, they maintain,
is to position himself for a run at another term as president in 2002.
"Simply by issuing this threat, Itamar has showed the president's
weakness, brought the government to its knees and given the opposition
a program," said Alexandre Barros, a political consultant here. "It's an
arm-wrestling match, and in the end, the federal government is going to
have to cede and negotiate less onerous terms for the states on their
debts."
In theory, Cardoso has numerous tools he can use to force Franco and
other rebellious governors to meet their financial obligations. The federal
government has already begun withholding Minas Gerais' portion of
federal revenue-sharing funds and can also retain the state's share of
money raised from sales taxes.
But Franco has raised the stakes in the dispute by threatening to default
on a payment of some $108 million in Eurobonds due early in February
unless the federal government unfreezes the funds it is holding back. Not
meeting that obligation would be disastrous to Brazil's international
image and credit rating, and the federal government has been forced to
announce that it will pay the bill for Minas Gerais.
Franco has also obtained a ruling from a sympathetic state court
forbidding the federal government from garnisheeing any of his state's
bank accounts. The decision is being appealed to higher courts, which
are expected to rule soon in favor of the federal government, but
Franco is also threatening to challenge the constitutionality of the
government's recent actions, which could be a far more prolonged
process.
Describing the president's actions as "a flagrant violation of the
federative pact that was consecrated in the constitution of 1988," Dutra
of Rio Grande do Sul has taken an equally challenging but less
confrontational approach. He has deposited the money his state owes
for this month in an escrow account while he too takes his case to the
courts.
Nevertheless, the federal government said Sunday it will no longer serve
as guarantor for any loans the Minais Gerais and Rio Grande do Sul
seek from international institutions. That will make it virtually impossible
for them to obtain any external credits and could also lead to
cancellation of loans that are already in the pipeline.
Brazil's history since the collapse of its monarchy 110 years ago has
been filled with struggles between states and the central government.
Under the military dictatorship that ruled the country from 1964 to
1985, however, most authority was concentrated in Federal institutions,
leaving both state governors and legislatures at all levels as mere
appendages.
But the constitution that went into effect 11 years ago dramatically
reversed that tendency, returning much autonomy to governors and
local officials as part of a larger trend toward democratization. To a
large extent, the federal government collects taxes and passes them on
to governors, who have considerable leeway in deciding where and
how to spend the money.
Those enhanced powers have given state officials marked influence over
their states' congressional delegations. In fact, Franco's deputy has
threatened to withdraw the support of 15 legislators he says are loyal to
him from the president's fiscal reform measures unless the federal
government "stops treating us so coldly."
Initially, Cardoso took a hard line against the defiance of the states,
warning that, "I will not allow the law to be ignored." Last week he
softened his language somewhat, saying that he has an "open door" for
the opposition, so long as "they present me with sensible solutions within
the prevailing rules."
That throws the ball back into Franco's court, and he gives no indication
of yielding. "The position of Minas is clearly defined," he said last week.
"We are in a moratorium."
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