FINANCE-BRAZIL: The Provinces Strike Back,

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Jan 7 1999 (IPS) - Brazil’s stock exchanges plummeted again Thursday following a moratorium declared by the Minas Gerais state government, launching a new internal source of financial turbulence which rebounded throughout the continent.

Governor of Minas Gerais, Itamar Franco – formerly president of the country from 1992 to 1994 – stated the situation could develop into a rebellion by the provinces, seriously hobbling central government’s fiscal adjustment efforts.

He announced he would not be paying state debts over the next 90 days due to an “absolute lack of funds” and the “chaos” inherited from his predecessor, Eduardo Azeredo. Also, he called a meeting of opposition governors to discuss joint action for January 18.

Franco belongs to the Brazilian Democratic Movement Party (PMDB), which forms part of the coalition backing President Fernando Henrique Cardoso, although it also has an independent faction.

Olivio Dutra, governor of Rio Grande do Sul, another important Brazilian states, supported Franco’s decision, but has so far not joined the moratorium, despite announcing that similar financial difficulties would be delaying payments due on January 15.

Dutra is one of the three governors of the opposition Workers’ Party (PT), elected in October and sworn in on January 1. Along with other left-wing parties, six states are headed by opposition leaders, now joined by Franco.

And while this is apparently a small minority in a nation of 26 states, the group includes some of the most important areas – like Rio de Janeiro, where the governor, Anthony Garotinho, is pushing for renegotiation of the state debt as the only way to avoid further moratoria.

Many of the new governors inherit massive debts negotiated with the central government in recent years, while having practically no way of avoiding a swelling deficit.

Minas Gerais owes 15.4 billion dollars to the federal government, spending 76 percent of fiscal income on paying the salaries of its employees. Figures in Rio de Janeiro are 18 billion dollars and 80 percent respectively.

The Minas Gerais moratorium undermined confidence on Brazilian ability to meet fiscal goals set with the International Monetary Fund, of 23 billion dollars this year in order to qualify for credits worth 41.5 billion dollars in three years.

Thus, the Sao Paulo stock exchange plunged 6.28 percent Thursday morning, accompanied by its Rio de Janeiro brother, together exerting a negative effect on the continental financial market.

Brazilian debt bonds lost up to 5 percent of their market value.

President Cardoso and Interior Minister Pedro Malan, criticised Itamar Franco’s attitude as damaging to fiscal adjustment, “retarding the reduction of interest rates, recovery of growth and the campaign against unemployment.”

The programme agreed with the IMF plans for a great fiscal push from the Brazilian states in order to produce a surplus of three billion dollars in this year’s accounts, also working against the additional difficulties generated by economic recession.

President of National Congress, Senator Antonio Carlos Magalhaes, demanded fulfilment of the agreements signed on state debts, stating that the established sanctions would have to be taken – like the suspension of federal resources to governments with moratoria.

Magalhaes and other economic authorities recalled the accords were clearly favourable to the states, with a 30 year payback period for outstanding debts and interest rates of only 6 percent per year. This means large subsidies, considering the Central Bank pays 29 percent as a minimum rate for funds from the financial market.

The Senate Economic Affairs Commission called on Governor Franco to clarify his decision and the financial situation of Minas Gerais.

The objective is to avoid the moratorium spreading to other states, including those governed by allies of President Cardoso, also worn down by the financial crisis, and greater dents to Brazil’s credibility with foreign investors.