BRASILIA Jan 10 Brazil's federal government is
less likely to authorize cash-strapped states to raise fresh
debt after the Supreme Court forced the Treasury to use its own
money to honor loans not paid by the Rio de Janeiro state, three
government officials told Reuters on Tuesday.
As the guarantor of nearly all loans contracted by states,
the Treasury has withheld states' own tax revenues to honor
missed payments. However, last week's court order prevents the
government from withholding those tax revenues, meaning it has
to use its own resources to honor unpaid debts.
Over the last five years, Rio accumulated billions of
dollars in government-backed loans with state-run lenders and
multilateral banks to pay for infrastructure ahead of the 2014
World Cup and 2016 Olympics.
But Rio, like several other Brazilian states, is unable to
pay back the money as the country's worst recession on record
drags down its tax income and oil royalties.
Hospitals across Brazilian states are running out of
supplies, police and teachers are not being paid and badly
needed infrastructure projects are frozen because of the crunch.
"The decision was well intentioned, but it creates a huge
problem. It fuels legal uncertainty that could undermine future
loans," said one of the officials who asked not to be named
because he was not allowed to speak publicly.
That uncertainty could discourage Brazil's Treasury from
approving new debt to states, said a senior finance ministry
official who also requested anonymity.
The ruling added pressure on President Michel Temer to reach
a deal with Rio de Janeiro this week to ease its financial
crisis before 6.5 billion reais ($2 billion) in local and
external debts are due this year.
The treasury's press office declined to comment for the
A deal with Rio would lift the order the head of the Supreme
Court, Carmen Lucia, that forced the federal government to
release 374 million reais for Rio de Janeiro to pay for wages
Critics say that such legal uncertainty hampers investment,
as individual judges have broad discretion to suspend debt
contracts, award labor compensations and halt building projects.
"If the court continues to grant those injunctions to states
without any fiscal adjustment then we will have a problem," said
Carlos Kawall, chief economist with Banco Safra and former head
of the national treasury
The government paid 2.2 billion reais in debt Rio failed to
honor last year, according to the Treasury. The state missed
payments to the Inter-American Development Bank (BID) and Agence
Française de Developpement.
Rio has about 340 million reais in payments due to the World
Bank next year, according to the state's finance secretary.
Other states are considering asking for similar injunctions
to prevent the government from withholding their transfers.
When a loan is not paid by a state, the federal government
withholds federal revenues earmarked for those local governments
to honor their obligations.
($1 = 3.197 reais)
(Reporting by Alonso Soto; Editing by Lisa Shumaker)