Union banks R$ 46 billion in unpaid debts by states and only recovers 11%

In recent years, the National Treasury has disbursed R$ 46.8 billion as guarantor of debts that state governments failed to pay to banks, financial institutions and multilateral organizations. Of this amount, only R$ 5.3 billion was recovered by the Union — or 11% of the total.

The numbers refer to the period between 2016 and 2022 (Treasury historical series) and are expected to increase even further in the coming months after favorable decisions to the states granted by the Federal Supreme Court (STF), authorizing governors to suspend payment of debts with creditors.

Court decisions have shielded states’ coffers against reimbursement to the Treasury, although loan agreements authorize the Union to seek the return of funds in the event of default.

For specialists, the trend of decisions favorable to the states in the STF serves as an incentive for greater spending by these entities, since any prospect of collection or punishment is reduced.

The consequence for the federal government is an increase in public debt, as the country needs to issue more bonds to honor commitments and avoid declaring a default, which would damage Brazil’s reputation as a whole.

Without considering the effect of inflation or interest paid on this debt, the amount not recovered is equivalent to about 0.6 percentage point of the country’s gross debt, which ended May at 78.2% of GDP (Gross Domestic Product ).

When asking for a suspension of payments, states often allege financial difficulties. The Union, in turn, is obliged to pay the installments because it is the guarantor of these contracts. It is a role similar to that of a guarantor in the property lease agreement, who is responsible for paying off debts if the tenant fails to honor his commitments.

The injunctions that suspend the payment of debts of states with other institutions are just another chapter in a history of legal battles between state governments and the Union.

The most recent of these involves setting a limit on the collection of ICMS on fuel, electricity, transport and telecommunications, a measure approved by the National Congress this year amid the arm wrestling between governors and President Jair Bolsonaro (PL).

The STF seeks to broker a deal after being called by the governors, for whom losses could reach R$92 billion. The Union, on the other hand, claims that the states have their coffers filled, given the general growth in revenue, and can reduce taxes.

Until a common denominator is reached, the Court has already ruled in favor of some states, allowing them to suspend the payment of installments of debt with the Union to compensate for their revenue losses.

For economist Marcos Mendes, researcher at Insper and columnist for Sheetthe history of conflicts demonstrates that the problem is not only in the loan guarantees, but “in the federative system as a whole”.

“There’s something that makes the STF win the case to the states in 98%, 99% of the actions, without any proof of the numbers. It’s just to say that it doesn’t have the financial capacity. states as incapable. This is an incentive to spend more, get into debt and not pay”, he says.

“This will be reinforced now in the dispute with the Union over ICMS, although in this case the states are right”, says Mendes.

In the case of commitments to banks and other institutions, delays began in 2016, and the states obtained the first injunctions in 2017, at the height of the crisis that forced them to pay civil servants’ salaries in installments and delay transfers to suppliers.

Years later, some state governments managed to renegotiate liabilities by joining the RRF (Tax Recovery Regime), a relief program designed to help heavily indebted states in exchange for adjusting their accounts. Even so, the money will only be recovered gradually, according to the schedule agreed with the federal government.

This is the case, for example, in Rio de Janeiro, which has already failed to pay R$ 28.6 billion in debts with other institutions, of which R$ 2.8 billion have been recovered. The values ​​do not consider the state’s debts directly with the Union.

The Rio de Janeiro government has already benefited from two injunctions in the STF, in 2017 and 2021. According to the Rio Finance Department, thanks to the protection of the regime, another R$ 18.4 billion in debts guaranteed by the Union will still not be paid during the nine years of validity of the recovery plan.

Other states still cling to injunctions to avoid a billion-dollar charge that could make their finances unfeasible, as is the case of Minas Gerais. Shielded by a 2018 court decision, the state has already failed to pay BRL 12.1 billion in loans to third parties, fully honored by the Federal Government – ​​which recovered only BRL 1.3 billion.

According to the Minas Gerais Finance Department, the state has a debt of R$116.5 billion directly with the Union and R$33.96 billion with other institutions, with the Treasury as guarantor. In both cases, payments are suspended.

“The application for joining the RRF has already been forwarded and accepted by the federal government. The government of Minas has a period of up to 12 months to forward the plan for approval”, he says.

According to the National Treasury, in 100% of the cases in which there was no recovery of the amounts honored by the federal government, the reasons were judicial impediments.

“The increase in guarantee honors without the corresponding recovery of counter-guarantees has the final effect of increasing the federal public debt, since these expenses are paid with debt issuance resources”, says the agency in a note.

The Treasury also states that it is not possible to estimate how much interest has already been paid on the public debt due to the activation of these guarantees. “However, it appears that the default of some entities has the effect of increasing the financial expenses of the federal government, burdening society as a whole.”

Part of the debts not paid by the states were contracted between 2012 and 2014, a period in which the government of former President Dilma Rousseff (PT) facilitated the indebtedness of the states to boost infrastructure works.

The problem is that there was no real increase in investments, only a replacement of the revenues that supported them. By using the loans, states now have more space in the budget to grant salary increases to civil servants — a type of expense that is difficult to reverse in times of crisis.

Since then, the system of guarantees has been reformulated by the Treasury to make it difficult for states that are already in financial health to be indebted. One of the rules provides that only those with an A or B grade (on a scale up to D) are eligible to receive federal approval. Before, it was possible to grant guarantee to anyone, through a special authorization.

However, Mendes believes that the ideal is for the Union to stop being the guarantor of last resort, as this creates a moral hazard — an incentive for states to act more risky in the face of the certainty that they will be rescued in any situation.

According to him, the most appropriate thing would be to create a guarantee fund, supplied and managed by the states themselves, which would be responsible for guaranteeing new loans. The economist’s assessment is that this would create incentives for a more responsible management of resources, as well as for the timely payment of obligations.