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Missed Rio payment 'credit negative' for all Brazilian states: Moody's

[SAO PAULO] Missed debt payments by Rio de Janeiro underscore credit risks facing all Brazilian states, adding to pressure on the federal government to offer more generous relief to struggling states, Moody's Investors Service said on Monday.

Moody's analyst Paco Debonnaire called Rio's missed payment to a French development bank last week "credit negative for all of Brazil's states" and stressed that the federal government is responsible for states' debts to foreign institutions.

"We expect that Rio's missed payment will further press the Brazilian government to offer more generous terms in its plan to renegotiate states' public debt," wrote Mr Debonnaire.

Last week, the treasury stepped in after Rio de Janeiro missed a payment of US$8 million to Agence Fran├žaise de Developpement. In early May, Rio also missed a payment to the Inter-American Development Bank (IADB).

The treasury could do the same in coming days to honor the state's debt with the IADB, Brazil's Treasury Chief Otavio Ladeira said in a press briefing on Monday.

Mr Ladeira said the amount would be discounted from the federal government's monthly tax revenue transfer to Rio de Janeiro, limiting the impact on the administration's finances.

The government announced last week that it would start negotiations with states this week to seek a solution to their fiscal woes in exchange for stricter spending guidelines to keep a lid on growing expenditures with personnel.

Less than 15 per cent of Brazilian states' outstanding debt is to foreign institutions, Mr Debonnaire said, and their foreign debt servicing totaled 5.3 billion reais in 2015, or less than 0.5 per cent of federal revenue.

Brazil's economic downturn, the worst since the 1930s for Latin America's largest economy, is weighing on public finances throughout the country, but Rio is suffering in particular as the state economy relies heavily on the struggling oil industry.

Late last month, Brazil's Supreme Court gave the federal government two months to renegotiate states' debt burdens, which have forced some state governments to delay payments to public employees and retirees.

Earlier in April, the court allowed states to reduce interest payments to the federal government temporarily.