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UPDATE 2-Brazil central bank to transfer 325 bln reais to Treasury to ease debt, liquidity strains

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BRASILIA, Aug 27 (Reuters) - Brazil’s National Monetary Council (CMN) on Thursday approved the immediate transfer of 325 billion reais ($58.3 billion) to the Treasury from the central bank to help pay down the public debt and ease growing strains on its ability to refinance debt.

The funds are part of the central bank’s 478.5 billion reais profits accrued in the first half of this year, mostly due to currency effects, and will help bolster the Treasury’s cash buffers that have been hit by the COVID-19 pandemic.

Under a 2019 law, the transfer is permitted in times of “severe liquidity restriction” to borrow or pay debt. Treasury and central bank officials said this transfer reflects the extraordinary market conditions recently.

The CMN is Brazil’s highest economic policy body and includes the economy minister and central bank president.

Treasury Secretary Bruno Funchal said there has been a “very significant increase” in debt maturing in the next 12 months as a share of total debt, the main red flag of short-term financing risk. That is now up to 23% or maybe more, from 18.7%, he said.

With Brazil’s total debt stock exceeding 4 trillion reais, that would indicate more than 900 billion reais maturing in the next 12 months.

Many parts of the Brazilian interest rate and yield curves have steepened recently, making the Treasury’s debt management more difficult and expensive. It has had to issue much more short-term debt, which increases refinancing risks.

Jose Franco, sub-secretary for public debt at the Treasury, would not be drawn on what the Treasury’s cash buffer is right now. But he said the aim is always to keep it above three months’ worth of refinancing needs.

The 325 billion reais will help give the Treasury more breathing space, but this does not mean less issuance, and expenditure will definitely not rise, Franco said.

“The Treasury will not be obliged to go to the market and roll over debt at any price, as our liquidity reserves will be strengthened further,” he said in an online press conference.

Funchal said the Economy Ministry had proposed a 445.2 billion transfer, and that the initial 325 billion could be increased at a later date if conditions warranted.

Earlier this year the Treasury had indicated it would seek up to 500 billion reais. But central bank President Roberto Campos Neto said last week that the bank must not be seen to be directly financing the government.

$1 = 5.57 reais Reporting by Jamie McGeever and Marcela Ayres; Editing by Sandra Maler, Richard Chang and Leslie Adler