Finance Ministry announces measures to help states in debt

The Finance Ministry on Wednesday announced a series of proposals to help states and municipalities obtain credit and pay their debt. 

The measures include a bill to change rules in the Fiscal Responsibility Law and the Fiscal Recovery Regime, as well as non-statutory instruments that do not require congressional approval. No deadlines for their implementation were given.

“We want to promote investment not only at the federal level, but also at the state and city levels,” Finance Minister Fernando Haddad told a press conference. He went on to thank his team and key congressional leaders for the work that led ratings agency Fitch to upgrade Brazil’s credit rating from BB- to BB, and reiterated his goal of bringing Brazil back to  “investment-grade” ratings.

The government announced a bill to ban states and municipalities from creating new expenses if they fail to reach primary surplus goals in a given fiscal year. This is already the case for the federal government.

All other proposed measures go in the opposite direction, of providing city and state governments more leeway in obtaining credit and raising expenses. For instance, the Finance Ministry proposes new rules for the Fiscal Recovery Regime that will make it easier for states to obtain better credit grades and hence better conditions to pay their debt to the central government.

It also proposes caps to interest rates for the local governments with better credit grades under the Fiscal Recovery Regime. Currently, the top interest rate is the same across all states.

The ministry also pledged to reduce bureaucracy and cut “excessive rules” in order to make it easier for states to obtain federal guarantees in credit operations for public-private partnerships.

The Luiz Inácio Lula da Silva administration’s economic agenda has been obsessed with credit. The government has publicly pressured the Central Bank to lower interest rates on several occasions. Chief of Staff Rui Costa even said in April that Brazil could increase its investment in sanitation if interest rates were lower. Last week, the government also launched a program to help families renegotiate their liabilities.

After initiating one of the world’s most aggressive monetary tightening processes between March 2021 and August 2022, taking benchmark interests from 2 to 13.75 percent (where it has remained since), the Central Bank seems finally poised to cut the policy rate — with markets expecting a half percentage-point reduction in August.

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