Temer gives Brazil states relief on billions in debt repayments

[BRASILIA] Brazil's government says it struck a deal with state treasuries that's designed to alleviate their fiscal crises without placing too much of a burden on federal coffers.

The deal was reached in a meeting between Acting President Michel Temer and state governors. It will cost the federal government 20 billion reais (S$7.91 billion) in 2016 and 15 billion reais in the two subsequent years, finance minister Henrique Meirelles told reporters after the meeting. The cost for 2016 is included in this year's budget projections, he said.

According to the terms of the deal, states will receive a discount on their debt payments to the federal government for 24 months. For the first six months they will make no payments at all.

"The interest of the nation prevailed," said Mr Meirelles.

The agreement comes after months of negotiations over 427 billion reais in debt that state governments owe the Treasury. The federal government said requests by governors to repay the obligations using simple rather than compound interest rates would place too much of a burden on its budget, while states warned of fiscal crises as they ran out of money to pay for basic services such as health care and police salaries.

Pressure on the Treasury intensified last week when Rio de Janeiro declared a state of emergency just as it gears up to host the Summer Olympics, cautioning of a "total collapse of public security" if it didn't receive money soon.

Mr Temer's administration pledged emergency funds, with his top aide saying the government had to help to protect the country's image during the Games.

The agreement comes as Mr Temer's economic team focuses on shrinking a near-record budget deficit that has cost Brazil its investment-grade credit rating and has eroded investor sentiment. Mr Meirelles has proposed a series of measures to shore up fiscal accounts, such as a cap on federal spending rates.

The deal also may mean that the Supreme Court doesn't have to rule on the matter, after states asked justices for permission to repay the debt using simple interest rates. It delayed its decision earlier this year to give the state and federal governments more time to negotiate an agreement.

Also as part of the deal, the government will ask Congress to authorise legislation that would cap spending at the state level.

BLOOMBERG