Union Steps in as Guarantor of Struggling States, Paying off US$ 25 billion in Loans

04/03/2018 - 12h51

In light of the fiscal deterioration that many states and municipalities are facing, the Union has had to cover the financial commitments that such entities have made over the past two years. The Union may end up taking on further debts as the outlook continues to look grim.

Rio de Janeiro's fiscal situation is particularly emblematic, although other states that are in a fragile situation are also being monitored.

According to a report conducted by the Senate's Independent Fiscal Institution (IFI), the Union had to cover nearly R$ 4 billion (US$ 1.2 billion) in loans that Rio alone took out in 2017 but failed to pay back.

The National Treasury gives credit scores that vary from A to D: the lower the grade, the higher the likelihood of defaulting. According to IFI analyst Josué Alfredo Pellegrini, five states with credit scores that are either C or D share between them 47% of the debt that the Union has had to pay off: their combined debt amounts to R$ 82.7 billion (US$ 25 billion). The five states are Rio de Janeiro, Minas Gerais, Santa Catarina, Goiás and Rio Grande do Sul.

When states and municipalities take out loans in order to make investments, for example, it is quite common for the federal government to act as a guarantor.

States and municipalities had been managing to pay off these loans up until 2016, when their fiscal situation became particularly delicate, leading the Union to step in and cover the first round of debt.

Santa Catarina, Goiás, Minas Gerais and Rio Grande do Sul have all stated that they are paying back their loans. Rio de Janeiro has said that its fiscal recovery plan will enable it to start tackling the debt it has accrued with the Union in 2021.

Translated by THOMAS MATHEWSON

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