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Financials

UPDATE 1-Brazil's Supreme Court delays vote on recalculating state debt

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BRASILIA, April 27 (Reuters) - Brazil’s Supreme Court on Wednesday delayed for 60 days a decision on whether to slash interest payments on states’ debts, a change that the federal government believes could reduce its revenues by around 400 billion reais ($113.46 billion).

Earlier in April, the court ruled to allow Santa Catarina state to recalculate its debt with the federal government, replacing compound interest rates for linear rates. Several other states have won similar rulings, raising fears that the change could also be applied to private debt contracts and hobble local lenders.

Finance Minister Nelson Barbosa has warned that the ruling would create a dangerous precedent for Brazil’s credit markets, sharply reducing interest payments, and fuel judicial uncertainty.

In a session broadcast live on television, the Supreme Court kept its ruling from earlier this month that allowed states to recalculate their debts, until it meets again in two months to decide on the matter.

If the court upholds the ruling, the debt states owe the federal government could be reduced by 90 percent to 41.9 billion reais, according to Finance Ministry data.

In April alone, the federal government expects to lose 2.6 billion reais in debt payments from states benefiting from the ruling, the ministry data showed.

Brazil is struggling with its worst fiscal crisis in decades after years of heavy spending, steep tax cuts and a deepening recession that have severely curbed government revenue. Last year, Brazil lost its investment grade credit rating by the three main rating agencies on concerns its widening fiscal gap could compromise debt payments.

State finances are also in disarray, with a sharp drop in revenues after years of expanding payrolls and spending. Many states have delayed payments of pensions, hospitals and public workers’ wages. ($1 = 3.5254 Brazilian reais) (Reporting by Marcela Ayres; Editing by James Dalgleish and Richard Chang)

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