Brazilian State Says It Won’t Pay Debt

At a time when Brazil is desperately trying to get its fiscal house in order, the newly inaugurated governor of Minas Gerais, Itamar Franco, said his state would not make payments on its $15-billion debt to the federal government, demanding terms be renegotiated. Although the governor of Rio de Janeiro state also threatened to follow suit, most other states are believed to be in President Fernando Henrique Cardoso’s camp and analysts discounted the possibility of “cascading defaults.” Besides, the federal government holds the whip hand in that it owes Minas Gerais and other states more in transfer payments than the states owe it, said ING Barings economist Arturo Porzecanski. But the news rattled the Brazilian bond market, sending prices down and yields up half a percentage point. The announcement came after the Sao Paulo stock market had closed up 3.1%, partly on the strength of a positive Senate vote in favor of a new tax on financial transactions. Cardoso says the measure, which requires three more votes for approval, is essential to cutting Brazil’s fiscal deficit and meeting terms of the $41.5-billion International Monetary Fund bailout.