UPDATE 1-Brazil debt refinancing on track, Mantega denies rift
By Tiago Pariz and Guillermo Parra-Bernal
SAO PAULO Dec 5 (Reuters) - Brazil's government is refinancing its debt despite a recent jump in borrowing costs, Finance Minister Guido Mantega said on Thursday, in a stark denial of reports that policymakers are at odds over fiscal policy.
A surge in debt yields in recent months followed the central bank's decision to raise the benchmark overnight Selic lending rate to fight inflation, Mantega said at the sidelines of an event in São Paulo. He dismissed the notion that higher borrowing costs are the result of eroding confidence on Brazil's fiscal position.
On Thursday, Brazil's main newspapers ran top page reports saying that some policymakers are unhappy with the way National Treasury Secretary Arno Augustin, a key Mantega aide, is conducting liability management. The reports, which cited sources familiar with the matter, said investors are demanding higher returns to refinance maturing debt, partly due to a deteriorating confidence on Brazil's public finances.
"All I can say to you is that there is no crisis at the core of the National Treasury," Mantega said. "Secretary Augustin is doing a lovely job. We are going to meet the goals we set forth in our fundraising plan."
Mantega said "it's foolishness" to blame Augustin for the higher yields when the Selic is going up and global liquidity is tighter with speculation over tougher U.S. monetary policy. The treasury, a ministry unit that handles the budget and government debt, declined to comment on the reports published by newspapers O Estado de S. Paulo and Folha de S. Paulo.
Investors are worried about President Dilma Rousseff's spending practices. She has used spending increases and tax breaks to revive economic growth but the strategy has fanned inflation - raising questions about the sustainability of the nation's $1.3 trillion debt.
The rapid erosion of the government's finances this year has alarmed the market, raising fears of a sovereign rating downgrade next year. Fiscal largesse is making it tough for Brazil to meet its already-reduced overall primary budget surplus target of 2.3 percent of the gross domestic product.
Yields on the fixed-rate note due in April 2015 surged to 11.13 percent on Thursday from about 7 percent at the start of the year. In contrast, the central bank lifted the Selic six times this year to 10 percent from 7.25 percent at the start of the year.
For inflation-linked bonds, especially for securities with the longer maturities, the surge in yields has been even greater - reflecting worries that the central bank will be unable to head off inflation.
The economy is not expanding "at the pace we would like, but it is certainly growing," he said, adding that investment will be the main engine for growth in 2014.
The exchange rate is going to be "more favorable" next year than it was in 2013, Mantega said, without elaborating. He dismissed the view that the central bank's renewal of a program to stem fluctuations in the Brazilian real could lead to a significant strengthening of the currency.
He does not expect the U.S. Federal Reserve's unwinding of years of monetary stimulus to trigger enormous global market turmoil. Markets anticipated the Fed's moves, and much of the Fed's potential policy tightening is already factored in, Mantega noted.
The government is likely to partially phase out tax breaks on vehicles when it revises the tax policy for the sector in January, Mantega said.
The move will be discussed with automakers, Mantega said. Executives at Anfavea, the country's automakers association, said on Thursday they expect the breaks to be removed and the cost of borrowing for subsidized financing to be raised as the government withdraws stimulus for the industry.