March 13, 2019 / 4:41 PM / in 8 days

UPDATE 1-Brazil needs constitutional change soon to fix state finances -Economy Ministry source

(New throughout, adds background and further comments from source)

By Marcela Ayres and Jamie McGeever

BRASILIA, March 13 (Reuters) - Changes to Brazil’s constitution are urgently needed to address the dire financial situation Brazilian states and municipalities find themselves in, a senior member of the government’s economic team told Reuters on Wednesday.

The source expressed more urgency to act quickly than a senior Economy Ministry official did in an interview with Reuters on Tuesday.

Many of Brazil’s 26 states are bankrupt and only kept afloat by funding from Brasilia, exacerbating the federal budget deficit which the government calls the biggest risk to Brazil’s economy.

Brazilian states’ combined deficit with the federal government stands at some 200 billion reais ($52 billion), Treasury figures show.

A senator has the power to start the political process for a constitutional amendment forging a new financing deal, or “federative pact,” between the federal and local governments by introducing a bill in the upper house, according to the source, who spoke to Reuters on condition of anonymity.

President Jair Bolsonaro, his chief-of-staff and the two house leaders in Congress are evaluating how exactly that will be done, the source said.

Lawmakers would discuss this process alongside Bolsonaro’s ambitious pension overhaul bill, which aims to shore up Brazil’s public finances by generating savings of more than 1 trillion reais ($261 billion) over the next decade.

Social security payments represent the biggest single hole in the public accounts, but states have been steadily bleeding cash for years, forcing the federal government to pick up the tab.

In an interview with Reuters on Tuesday, Rogerio Marinho, secretary of social security and labor at the Economy Ministry, said a “federative pact” via constitutional change was being considered but the government would not “necessarily” propose it soon.

Last month, Treasury Secretary Mansueto Almeida said states must make difficult decisions to rein in spending, but the federal government is exploring avenues such as loan guarantees to ease the burden.

Rio de Janeiro is the most indebted state, its 37 billion reais negative balance with Brasilia accounting for 14 percent of the total. Next is Sao Paulo with 32 billion reais, or 12.4 percent of the total, although that is far smaller than Rio as a share of its economic output. (Reporting by Marcela Ayres, writing by Jamie McGeever Editing by Chizu Nomiyama and DAvid Gregorio)

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