Brazil states relax austerity deal in defeat to Temer

December 1, 2016 3:54 PM EST

Michel Temer reacts during a meeting of the presentation of economic measures, at the Planalto Palace in Brasilia, Brazil, May 24, 2016. REUTERS/Adriano Machado


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By Alonso Soto

BRASILIA (Reuters) - Governors of cash-strapped Brazilian states on Thursday got President Michel Temer to bow to their demands to relax tough austerity measures, throwing the country's pledges to rebalance its depleted accounts further into doubt.

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

Struggling to pay their pensioners and employees, many governors have accused Temer of trying to impose harsh measures in exchange for revenues from an asset repatriation amnesty that they argue states are entitled to.

After meeting with Temer, Santa Catarina Governor Raimundo Colombo told reporters the states will work on a "general commitment" to seek measures to limit their spending and reform their pension systems to reduce their budget deficits over 10 years.

Piaui Governor Wellington Dias, a member of the opposition Workers' Party who heads a forum that represents all governors, said earlier the states had agreed to enact their own measures as soon as possible without any imposition for the federal government.

In the original deal, billed last week as a national pact, the government said it was going to share 5 billion reais ($1.4 billion) from an asset amnesty program with states if they freeze wages for two years, cut expenditures on contractors by one-fifth, and overhaul their pension systems.

Finance Minister Henrique Meirelles later told reporters that the deal showed the fiscal commitment of states, but acknowledged that the government was going to share the funds with them independently of whether they comply with the measures.

Dias and other governors had 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 corporate 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 have 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, Phil Berlowitz and Lisa Shumaker)



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