SUNS  4357 Thursday 21 January 1999

Brazil: States demand one year debt moratorium


Rio de Janeiro, Jan 19 (IPS) - Seven state governors in Brazil demanded a one-year suspension of payments on their debts to federal coffers - the latest development in the episode which began this month with a 90-day moratorium declared by the state of Minas Gerais, which aggravated Brazil's financial crisis.

The governors, six of whom belong to opposition parties, met Monday in Belo Horizonte, the capital of Minas Gerais, where they declared that their state governments were unable to live up to the payments agreed on by their predecessors, which absorb 11 to 15 percent of the states' monthly fiscal revenues.

The governors also want to negotiate a new "federative pact," arguing that the central government adopts economic decisions that affect the finances of states and municipalities without consulting them.

"We want the same treatment granted Sao Paulo," which was given a one-year grace period in an accord reached last year on its debt to the central government, said Anthony Garotinho, governor of Rio de Janeiro, the only Democratic Labour Party governor.

Monday's meeting was convoked by the governor of Minas Gerais Itamar Franco, a former president, who declared his state's moratorium on payments Jan. 6, triggering a new wave of capital flight from Brazil, which culminated in last week's devaluations of the real, the local
currency.

While the rest of Brazil's 27 governors see the allotment of up to five or six percent of their fiscal revenues to paying their debt to the central government as acceptable, Franco said that "Minas Gerais cannot pay anything at this time." He argued that he did not even have the funds needed to pay his government's employees nor feed the state's prisoners.

Investors saw the moratorium as a sign of Cardoso's difficulty in keeping a grip on the domestic political front, and stepped up the outflow of capital, with the consequent pressure on international
reserves and the Real.

Ronaldo Lessa, the Socialist governor of the northeastern state of Alagoas, announced that he would also be unable to pay the national treasury the debt totalling 31 million Reals (approximately $19.5 million) inherited from his predecessor.

The seven states represented in Monday's meeting owe the central government a combined total of $35.3 billion, accounting for 44% of what the country's 26 states plus the Federal District owe federal offers. Since 1990, the Finance Ministry and the states have been negotiating a refinancing of the debts, agreeing on payments of up to 15% of each region's tax revenues.
The most highly indebted state is Sao Paulo, Brazil's industrial engine, which owes the federal government more than $30 billion.

The governor of Sao Paulo, Mario Covas, belongs to Cardoso's Brazilian Social Democratic Party, and does not support the initiative by the seven governors who met Monday in Belo Horizonte. But he is in favour of discussing the debt issue with the opposition.

The Belo Horizonte gathering chose a commission of three governors to meet with President Fernando Henrique Cardoso, inform him of the drastic situation of state finances and seek a renegotiation of the debts.

A new meeting was scheduled for Feb. 5 in Porto Alegre, the capital of Rio Grande do Sul, a southern state governed by the Workers Party's Olivio Dutra.

For the time being, the governors are to work out their payments to the central government separately, according to their particular situation and possibilities. But Rio de Janeiro Governor Garotinho warned that a joint action could be decided on Feb. 5, if the governors have not
received a satisfactory response from the president by then.

All of Brazil's 27 state governors, including the 20 who support Cardoso, have been invited to the Feb. 5 gathering, because the need to reestablish the "broken federative pact" is a question that affects everyone, according to Dutra.

Eighteen governors of the parties that comprise the governing alliance met Jan. 12 to condemn the moratorium declared by Minas Gerais. But they also demanded better conditions for servicing their debts, especially complaining about the high interest rates, and admitted that the problem compromised the administrative capacity of the states.

Nearly all of Brazil's states are in serious financial trouble, with bulky debts that have built up over decades, and payrolls that in some cases account for 80 percent of revenues.

In the past few years, the federal government has transferred most of the costs of the social security system to the states and municipalities, while maintaining, however, its budgetary control over the system.

The Finance Ministry calculates that by November at least nine states will reach the limit of their capacity to meet their debt payments without compromising other obligations.

Among them figure the country's five  most important states - Sao Paulo, Minas Gerais, Rio de Janeiro, Bahia and Rio Grande do Sul - which account for 55.3% of Brazil's total population of over 160 million and comprise the country's industrial and economic backbone.

In an attempt to reorganise public sector accounts, the central government negotiated accords with 24 states in the past two years, making their debts repayable within 30 years through monthly payments. The opposition governors, however, reject those contracts.

Jairo Nicolau, with the University Institute of Research in Rio de Janeiro, said the movement of "rogue" governors had little chance of achieving a profound revision of the economic-financial relations between the central and state governments.

"The big economic decisions are centralised in the federal capital, Brasilia. The states are nearly totally dependent, in financial terms, on national monetary authorities, and a change would have inevitable external repercussions at this time," said Nicolau.

Cardoso said he was open to dialogue with all state governors, but reiterated that the terms of the accords already signed must be met.

A renegotiation at this time could further damage the international credibility of the Brazilian economy, especially of the fiscal adjustment considered indispensable for recovering confidence and preventing new attacks on the real.

On Monday, Cardoso met with the presidents of the Senate, Antonio Carlos Magalhaes, and the Chamber of Deputies, Michel Temer, to reaffirm the harmonious relations between the executive and legislative branches and accelerate the votes on measures seen as key for recuperating the confidence of the financial markets.

Magalhaes said the Senate should easily approve the hike in the tax on financial movements, from 0.2 to 0.38 percent. The tax on all bank withdrawals represents half of the fiscal effort agreed on with the International Monetary Fund (IMF).

The lower house of parliament is facing the toughest challenge: approving an increase in social security contributions by public sector pensioners, a project that has already been voted down by parliament four times.

The mounting pressure by the governors and the reluctance of some ruling alliance lawmakers to support government initiatives have generated uncertainty with respect to the Cardoso administration's ability to ward off new speculative attacks on the real and continued
devaluations, which would further aggravate the global financial outlook and local recession.

With the devaluation of the real, Brazil now depends more on its own decisions than on external pressures, said Cardoso, who underlined the need to approve the fiscal measures in order to achieve a prompt reduction in internal interest rates which he described as something for which "everyone is longing."