Missed debt payments by Rio de Janeiro underscore credit risks facing all Brazilian states, adding to pressure on the federal government to offer more generous relief to struggling states, Moody's Investors Service said on Monday. Moody's analyst Paco Debonnaire called Rio's missed payment to a French development bank last week "credit negative for all of Brazil's states" and stressed that the federal government is on the hook for states' debts to foreign institutions.
"We expect that Rio's missed payment will further press the Brazilian government to offer more generous terms in its plan to renegotiate states' public debt," wrote Debonnaire. Less than 15 percent of Brazilian states' outstanding debt is to foreign institutions, Debonnaire said, and their foreign debt servicing totalled 5.3 billion reais in 2015, or less than 0.5 percent of federal revenue.
Brazil's economic downturn, the worst since the 1930s for Latin America's largest economy, is weighing on public finances throughout the country, but Rio is suffering in particular as the state economy relies heavily on the struggling oil industry. Rio missed a payment of 8 million reais ($2.2 million) last week to Agence Fran?aise de Development after a missed payment earlier in the month to the Inter-American Development Bank.
Late last month, Brazil's Supreme Court gave the federal government two months to renegotiate states' debt burdens, which have forced some state governments to delay payments to public employees and retirees. Earlier in April, the court allowed states to reduce interest payments to the federal government temporarily.