Public finances in Brazil Going for broke

IN THIS week's print issue we wrote about the huge increase in government-subsidised credit in Brazil in recent years, funnelled through state-controlled institutions such as the national development bank, BNDES, and Caixa Econômica Federal, a state retail bank.

This is weakening the banks' balance-sheets and cutting their credit ratings—and damaging the credibility of official statistics as the government manoeuvres to try to hide the impact on its own finances.

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On October 14th the finance minister signalled a change of course, saying that over the next few years the government would gradually stop capitalising BNDES with transfers from the treasury. But as we explained in print, the electoral appeal of cheap consumer credit and the government's desire to use BNDES to fund a big upcoming infrastructure-concession programme make it doubtful that such good intentions will become reality.

Equally worrying for Brazil's public finances is the news that the federal government is about to make it easier for states and municipalities to take on more debt. The Fiscal Responsibility Law of 2000 bailed out local governments who had taken on debts they could not repay, with one of the conditions being the acceptance of strict limits on total future indebtedness. The law is generally regarded as having been an essential precondition for Brazil's subsequent economic stabilisation and growth, including keeping inflation under control, gaining investment-grade status, rescuing tens of millions from dire poverty and creating a vast new lower-middle class.

At the time the Fiscal Responsibility Law was passed Brazilian interest rates were high, since hyperinflation had only been vanquished a few years earlier and swingeing rates were needed to stop a resurgence. That makes the rates charged on the loans to states and municipalities look swingeing today, though they were in fact modest by the standards of the day. So the federal government’s announcement that from next year it will be cutting those rates does not at first sight seem remarkable.

But the devil is in the details.

The new rates will be applied retrospectively—meaning that not only will future debt-servicing costs fall, but that the total amount of debt outstanding will plummet. Local governments will therefore be able to borrow lots more straight away to fund current spending without breaching the strict limits imposed by the law. With elections due in October 2014, they are sure to leap at the chance.

#Πηγή:
 Public finances in Brazil Going for broke
http://www.economist.com/blogs/americasview/2013/10/public-finances-brazil

Oct 18th 2013, 18:27 by H.J. | SÃO PAULO

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