Brazil’s Small Businesses, Farms Get Debt Amnesty

The Brazilian Congress has voted to forgive large portions of debts owed mostly to government banks by owners of small farm and businesses, and officials are warning that the measure will seriously squeeze government finances.

“To save the fiscal policy, we are going to have to take some very serious measures,” President Jose Sarney said Thursday. To begin with, he said, the government will suspend some budgeted investments that would benefit agriculture and small businesses.

According to an initial estimate, the debt “amnesty” approved Wednesday night could cost $500 million. Wadico Bucchi, a central bank official, said three-quarters of the debts covered by the partial amnesty are held by government banks.

Bucchi told a Brazilian newspaper that “the bomb clearly will end up exploding in the hand of the taxpayer, because other revenues will have to be approved to cover those losses.”

A Planning Ministry spokesman said the government will also have to cut its costs, emphasizing that an official austerity program aimed at reducing Brazil’s fiscal deficit is “untouchable.” But some independent analysts said the debt amnesty will make it impossible to hold the fiscal deficit to 4% of the gross domestic product as planned.

That goal is part of commitments made by Brazil recently in renegotiating its $120-billion foreign debt and seeking fresh foreign credit.

Brushing aside government objections, the Congress approved the debt amnesty by a vote of 286 to 163, six votes more than the minimum needed for passage of a constitutional measure. The provision is part of the transition section of a new constitution being drafted by the Congress.

There is still a chance for changes in the constitutional text during a final round of debate scheduled to begin in mid-July, but any amendment will need 280 votes to pass.

The debt amnesty sharply reduces debts contracted by small farmers from Feb. 28, 1986, to Dec. 31, 1987, and by small businessmen from Feb. 28, 1986, to Feb. 28, 1987. The February, 1986, date marked the beginning of a government-imposed freeze on prices and interest rates that was enforced until early 1987.

During the first eight months of the freeze, official inflation was held to 10%, and no indexing was permitted on loans. The freeze failed in late 1986, leading to the return of indexing to compensate for the inflation that was galloping once again.

It is the effects of that indexing, called “monetary correction” in Brazil, that will be forgiven under the new amnesty, leaving payable debts at a fraction of their original dollar value. Official inflation was 366% during 1987, and 168% in the first six months of this year.

Loans of more than $40,000 are not eligible for the amnesty. Congressman Jose Lourenco estimated the cost of the measure at no more than $500 million. Nevertheless, many analysts criticized the amnesty.

“The government will no longer be able to contain the public deficit this year to 4% of the gross domestic product,” warned Roberto Macedo, president of a national association of economists and a professor at the University of Sao Paulo. “It was a disaster for the country.”

Jose Vieira, president of the private Amerindus bank, said the bank will stop lending money to small farmers and businessmen. He suggested that if they want credit, they should go to their congressmen.