Federal Government Pays R$633.71 Million in August to Cover Defaulted State Debts

RIO DE JANEIRO, BRAZIL – The data are in the Report of Enforceable Guarantees by the Federal Government in Loan Operations, released yesterday, September 16th, by the National Treasury Secretariat.

Coverage of defaults incurred by the state of Minas Gerais totaled R$198.69 million (US$49.672 million) and R$190.79 million for the state of Rio de Janeiro. In the case of Rio Grande do Norte, R$10.29 million were paid by reason of the guarantees.

Guarantees are enforced by the federal government when a state or municipality defaults on a loan transaction. In this case, the Treasury covers the default but retains transfers from the federal government to the defaulting state until the difference is settled, charging a fine and interest.

In the period from January to August this year, the Treasury has honored R$5.25 billion of guaranteed state debt.

“The amount already exceeds the R$4.82 billion honored last year, which means that the total honored in 2019 will be the highest in the historical series, started in 2016,” reported the Treasury.

The guarantees honored by the Treasury are deducted from the federal government’s mandated transfers to state governments – such as income from equity funds and Tax on the Circulation of Goods and Services (ICMS), among others.

Overdue obligations are subject to interest, arrears and other operating costs related to the period between the debt maturity and the effective payment of the amounts by the Federal Government.

Over the past two years, however, decisions by the Federal Supreme Court have prevented the enforcement of counter-guarantees by several states in financial distress.

With Rio de Janeiro’s accession to the tax recovery package in late 2017, the state was able to contract new loan operations with federal government guarantees, even though it was in default.

The state of Minas Gerais is prevented from borrowing from the Treasury until August 26th, 2020; Goiás, until August 21st, 2020; Piauí, until September 13th, 2019; Rio Grande do Norte, until August 22nd, 2020; and Roraima, until December 12th, 2019, because these states have not joined the fiscal recovery program.

The city of Natal, which did not repay debts to the Federal Government in 2017, will not be able to take out loans guaranteed by the Treasury until December 28th of this year.

Source: Agência Brasil