Brazil’s Federal Government Paid R$368.24 Million in Defaulted State Debt in January

RIO DE JANEIRO, BRAZIL – In January, the National Treasury paid R$368.24 (US$85) million in defaulted state debts. The largest part of this total, R$147.07 million, is related to Minas Gerais’ default. In addition, R$126.21 million were paid on behalf of the state of Rio de Janeiro; R$78.22 million for Goiás and R$16.75 million for Amapá.

Unlike the last few months, the Treasury did not pay any outstanding debts from municipalities in January.

The data are included in the Report on Guarantees Honored by the Federal government in Credit Operations, released yesterday, February 17th, by the National Treasury Secretariat.

Guarantees are executed by the federal government when a state or municipality defaults on any credit operation. In this case, the Treasury covers the default, but withholds transfers from the federal government to the debtor until the latter settles the balance due, charging a fine and interest.

The Treasury covered R$2.377 billion in 2016; R$4.059 billion in 2017; R$4.803 billion in 2018, and R$8.35 billion in 2019, in both state and municipal outstanding debts.

The guarantees honored by the Treasury are discounted from the central government’s transfers to the local entities, such as revenue from equity funds and the Tax on Circulation of Goods and Services (ICMS). Interest, arrears and other operating costs related to the period between the debt’s maturity and the effective payment of the amounts by the federal government are levied on the outstanding debt.

Federal Supreme Court (STF) decision

With the accession of the state of Rio de Janeiro to the tax recovery regime in late 2017, the state was able to enter into new credit operations with the federal government as guarantor, even though it was in default. However, over the past two years, Federal Supreme Court (STF) rulings have prevented the execution of counter-guarantees from several states in financial difficulty.

Some counter-guarantees of Minas Gerais are also not being executed as a result of injunctions granted by the Supreme Court. In November 2018, the STF granted an injunction in order for Goiás to join the tax recovery regime, even though it did not meet all the requirements to be granted the aid.

Amapá is unable to raise funds with Treasury guarantees until January 20th, 2021, and Goiás may not borrow until January 21st, 2021. Not having joined the tax recovery program, Minas Gerais is prevented from taking out financing with Treasury guarantees until January 28th, 2021.