Markets Fall Amid Brazil Debt Crisis

BRASILIA — Brazilian markets reeled as the federal government cut off aid to a state that suspended debt payments, threatening the same retaliation against other regions seeking to renegotiate billions of dollars of obligations to Brasilia.

The escalating conflict among Brazil’s cash-strapped governments makes it tougher for the federal government to narrow its projected $64-billion deficit and reduce interest rates that topped 32%.

“Given its own precarious financial condition, the federal government can ill afford to increase its subsidy to the states by granting still more concessional terms,” said Lacey Gallagher, director of Latin American sovereign debt ratings at Standard & Poor’s Corp.

On Monday, the federal government withheld about $10 million in funds it would have normally transferred to the state of Minas Gerais. The move sought to punish one of Brazil’s most populous states, which last week suspended payments on its $15 billion of debt for 90 days.

Minas Gerais’ governor, Itamar Franco, sent shock waves through international markets last week when he announced the 90-day moratorium, rekindling fears that the world’s eighth-biggest economy might be heading for an Asian-style financial collapse.

A recent weakening of the dollar has also been attributed to Brazil’s latest problems. The United States sends about 20% of its exports to Latin America and a full-blown crisis in Brazil might plunge the rest of the region into recession.

With no end to the standoff in sight, battered stock prices on Sao Paulo’s Bovespa index tumbled further Monday, falling 5.6% and bringing losses over the last three sessions to 12.7%.

The yield on the C bond, the most widely traded emerging market security, jumped to 17.1%, the highest since Sept. 14, as traders said they increased “short sales”--betting the bonds would extend their decline.

Officials from at least two more states--Rio Grande do Sul and Goias--said they’d seek debt relief in Brasilia this week.

Compounding investor concerns, Minas Gerais has a $100-million Eurobond maturing next month. The federal government has guaranteed the bond, though the state has sent mixed signals over its desire or ability to pay it.

Minas Gerais Vice Gov. Newton Cardoso on Monday said that bonds will be repaid, a Brazilian news service reported. The decision was announced after Gov. Franco met with officials of Paris-based Banque Indosuez, the lead managers of the 1994 bond sale.

While no other states have followed Minas Gerais’ lead, the debt moratorium has kicked off a movement by several states to seek easier terms on debt accords.

Several states claim that they have no money to pay the $83 billion owed the government. Together, the states’ pay about $725 million a month to service it.