Brazil to provide relief to indebted states, municipalities
BRASILIA/SAO PAULO Oct 9 (Reuters) - Brazil's federal government will provide relief to states and municipalities grappling with high debt, giving governors and mayors more room to spend a year before elections.
The finance ministry agreed late on Tuesday to change the benchmark index that is used to calculate the interest that regional governments pay on their liabilities with the federal government, and make the change retroactive through 1997. The new terms imply the replacement of a wholesale and consumer price index known as IGP-DI for the benchmark consumer price index IPCA.
The decision is unlikely to have an impact on the federal government's balance sheet, said Dyogo Oliveira, the ministry's acting deputy executive secretary. Lower house lawmakers are expected to approve a bill enacting the changes on Wednesday. The Senate also has to vote on the bill.
"The fiscal situation of states and municipalities is rather tight and the solution that is being proposed is a matter of fiscal justice," Oliveira told reporters in Brasilia. "It's not fair that the federal government profits from the current arrangement at the expense of states and municipalities."
The move will especially benefit the city of São Paulo, Brazil's largest and most populous and which the ruling Workers' Party won in an election last year, analysts said. According to Valor Econômico, the city of São Paulo will see its debt with the federal government trimmed by 44 percent to somewhere around 30 billion reais ($14 billion), freeing up Mayor Fernando Haddad to finance 5 billion reais of new investments.
Brazilians will elect a new president, state governors, lower house lawmakers and a part of the Senate in October 2014. President Dilma Rousseff, who has expanded government spending dramatically since taking office at the start of 2011, is expected to run for a second, four-year term.
States and municipalities are currently legally forbidden from selling debt because of federal government-imposed curbs. Tuesday's decision meant that some of those curbs, which form part of the Fiscal Responsibility Law enacted in 2000, are beginning to be eased as Rousseff seeks to encourage investment across the country.
The law, known as LRF in Brazil, has been a pillar of the government's financial stability in recent years, also helping regional government straigthen up their finances since its implementation. The stock of regional debt nears about 400 billion reais ($181 billion) - much of which could be refinanced so it alleviates the cost of debt-servicing for states and cities.
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