Lula government’s nod to indebted states creates dissatisfaction with the North and Northeast – 03/24/2024 – Market

The decision by the Luiz Inácio Lula da Silva (PT) government to renegotiate the states’ debt opened a new front of dissatisfaction among governors from the North and Northeast, who are less indebted and demand alternative measures to cover the regions.

Only four states (São Paulo, Rio de Janeiro, Minas Gerais and Rio Grande do Sul) alone account for 87% of the net consolidated debt of all entities in the Federation, estimated at R$826.4 billion at the end of 2023.

By definition, they tend to benefit most from the renegotiation — which may involve a reduction in debt interest and, eventually, a review of the stock accumulated to date.

In the Northeast, the main beneficiaries should be Bahia, Pernambuco and Alagoas. Even so, the magnitude is much smaller: together, these states have a net consolidated debt of R$43 billion.

Today, debts are corrected by IPCA (Broad National Consumer Price Index) plus a real rate of 4% per year. The states in the South and Southeast want to change to a fixed correction of 3% per year. They also want the inventory reviewed and calculate a 15% relief on the amount owed.

The federal government was to present a proposal at a meeting with governors on Tuesday (26). The Union’s indication should be to change the debt correction to IPCA plus 3%, which is below the expectations of the most interested states and should keep the impasse open.

Furthermore, representatives of the states least favored by the negotiation began to criticize behind the scenes the fact that the Union, once again, offered flexibility for those in debt, many of whom failed to comply with rules, granted adjustments without due compensation or resorted to the courts to not paying debt installments on time.

The possibility of São Paulo benefiting from the relief has also caused jealousy in the poorest states, mainly in the Northeast, because the São Paulo government has boasted that its finances are healthy.

Politically, the topic is sensitive because the governor of São Paulo, Tarcisio de Freitas (Republicans), is an ally of former president Jair Bolsonaro and an opponent of Lula.

Still, the region’s representatives do not want to harm those states in the Northeast that will benefit. Therefore, the focus is to demand other additional measures to “reward” good payers, such as more access to credit for investments, lower interest rates and priority in the indication of PAC (Growth Acceleration Program) projects.

Senator Alessandro Vieira (Cidadania-SE) was in a meeting last week with the executive secretary of the Ministry of Finance, Dario Durigan, to discuss the topic.

“It is not up to the Federation to pay the bill for terrible management forever. This will have to be resolved, we are a single country, but it is necessary to have a more rational distribution and encouragement for those who do their homework”, he told Sheet.

Vieira acknowledged that indebted states need help to “prove themselves viable”, but defended taking into account each one’s behavior in light of the various agreements already signed.

“There is a repeated practice of non-compliance with conditions, betting on a new possibility of future refinancing. We have to start making a separation, punishing or restricting the actions of managers. Even to ensure that in a few years’ time we will not be discussing a new bailout “, he stated.

Repeated non-compliance with rules also bothers Executive technicians. Members of the National Treasury sent other government interlocutors a kind of summary of Rio de Janeiro’s fiscal framework, which has been in the RRF (Fiscal Recovery Regime) since 2017.

The Treasury’s diagnosis is that, in the last two years, Rio dedicated more fiscal space to expanding personnel spending than to paying its debt.

While the payroll increase was R$17.5 billion between 2021 and 2023, including Legislative and Judiciary branches, the state paid only R$5.6 billion of its debt, according to official data.

Technicians also remember that, in 2021, the government of Rio de Janeiro pocketed R$ 18.2 billion with the concession auction of Cedae (Companhia Estadual de Águas e Esgotos), whose shares were given as counter-guarantee in a loan that the Union paid in place of the state, and appealed to the STF (Supreme Federal Court) so as not to have to reimburse the federal government. The payment of R$4.3 billion was spread over 30 years.

Minas Gerais, in turn, managed to join the RRF thanks to an injunction from the STF, but was unable to move forward with practically any of the adjustment measures, such as the sale of assets or review of employee benefits. The state also increased its personnel bill.

Technicians from states that demand renegotiation consider that it is not viable to keep salaries frozen for a long time and that, over time, there is a type of “fiscal fatigue”. In this scenario, there is a need to take some breather.

The issue is that some have exaggerated the dose and used an “entire oxygen balloon” when deciding on salary adjustments, some technicians acknowledge.

Another argument used by indebted states is that the federal government already grants subsidized interest to agribusiness, in the Safra Plan, and to industry, via innovation projects. Therefore, in their view, it would make sense to subsidize public policies implemented by state governments.

Author and rapporteur of renegotiation laws approved in recent years by Congress, deputy Paulo Paulo (PSD-RJ) defends the creation of a Desenrola for over-indebted states to get out of the spiral of programs that have not worked.

“After three decades in the ICU, Rio, Minas Gerais and Rio Grande do Sul simply became payroll managers and were unable to leave [dos programas] and solve the problem”, he criticized. For him, the governors’ strategy of bringing the other states to renegotiate their debts is wrong.

The deputy presented a renegotiation project that provides for an initial 15% cut in the stock and additional discounts for those who are over-indebted in three magnitudes —5%, 10% and 15%—, which increase as public safety and health indicators improve and education.

“São Paulo has a huge debt, but it has an economy and can pay this debt. It’s not a matter of life and death for him,” he said.

The secretary of São Paulo, Samuel Kinoshita, told Sheet that the renegotiation of the approximately R$279 billion owed to the Union will allow a reduction of “billions” in the annual cost of charges (currently R$19 billion). The state wants to use the relief in installments to increase investments.

The renegotiation proposal under discussion was brought forward by the governor of Rio Grande do Sul, Eduardo Leite (PSDB), who, despite having made a broad adjustment that included privatizations, continues to have difficulties.

For him, the debt of over-indebted states is unpayable and compromises investments, the competitiveness of companies and the country’s GDP (Gross Domestic Product).

The movement for a new renegotiation gained momentum at the end of last year, when the president of the Senate, Rodrigo Pacheco (PSD-MG), entered the field to seek an agreement for his state’s debt.

On the eve of votes on important projects for Minister Fernando Haddad (Finance) to increase federal revenue, Pacheco presented Lula with a renegotiation proposal that included the federalization of state companies and a “State Refis”.

The following day, the Senate’s CAE (Economic Affairs Committee) cleared the agenda and approved a project to tax the funds of the super-rich and those held abroad through offshore companies.

With the political intention of being governor of Minas and with an eye on the support of the Lula government, Pacheco facilitated voting on projects of interest to the government.