December 1, 2016 / 2:45 PM / in a year

Brazil states demand less austerity to salvage fiscal pact

BRASILIA, Dec 1 (Reuters) - Governors of cash-strapped Brazilian states on Thursday will demand President Michel Temer relax the terms of an austerity pact announced last week aimed at closing their yawning budget deficits, Wellington Dias, governor of Piaui, told Reuters.

Disagreements between the federal and state governments over the austerity deal to assuage their financial woes has raised fears of a full-blown crisis that could stoke a recession already threatening to stretch into a third year.

Dias, a member of the opposition Workers’ Party who heads a forum that represents all governors, accused the government of trying to impose harsh measures in exchange for revenues from an asset repatriation amnesty that states are entitled to.

To salvage the deal, billed last week as a national pact, Dias said governors will propose measures to limit spending and cut pension deficits in Thursday’s meeting with Temer.

“There is a thread of hope,” Dias told Reuters. “We are willing to adopt concrete measures this year.”

Those include raising the welfare contribution of civil servants, limiting spending on payroll to 46 percent of tax revenues, and creating investment funds, he said.

That falls short, however, of the government’s demands for states to freeze wages for two years, cut expenditure on contractors by one-fifth, and overhaul their pension systems.

Dias and other governors have complained the government’s suggested measures could suffocate their economies amid the deepest recession in memory.

Newspaper Valor Economico said the government is considering drafting legislation similar to companies’ bankruptcy law to help states that are in the worst financial shape.

The finance ministry declined to comment.

Two years of back-to-back economic contraction has dragged down the revenues of states and cities now struggling to pay hefty pension and payroll bills.

Rio de Janeiro state, which hosted the Olympics this year, is facing perhaps the most acute crisis. It has failed to pay teachers, doctors and firemen and to maintain public services.

Violent street protests against an austerity package in Rio have put the Temer administration on alert, with some officials worried they could spread to other states and erode the already weak popularity of the president. (Reporting by Alonso Soto; Editing by Daniel Flynn and Bernadette Baum)

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