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State-government bailouts in Brazil

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  • Afonso S. Bevilaqua

    (Department of Economics PUC-Rio)

Abstract

As a result of the consolidation of the democracy after the end of the military regime in the mid-1980s, Brazil has gone through a period of remarkable decentralization both in fiscal and political terms. The move towards decentralized management and control of public finances has been followed by a series of bailouts of state governments by the federal government. The lack of effective control on borrowing, coupled with reputational effects originating from these repeated bailout operations, reduced fiscal discipline and created an explosive accumulation of debts in Brazilian states during the last decade. The main purpose of this paper is to assess the determinants of state debt bailouts in Brazil and their relationship with states’ fiscal discipline during the 1990s. After providing a brief overview of intergovernmental fiscal relationships in the Brazilian economy, the paper describes state debt developments from the mid-1980s on, with special emphasis on the 1989, 1993 and 1997 state debt bailouts. Then it discusses the determinants of state debt bailouts in Brazil along the lines of a conceptual framework which recognizes that the essence of the bailout question is the issue of moral hazard and also presents empirical evidence that the occurrence of bailouts is associated with lower fiscal discipline in Brazilian states during the 1990s.

Suggested Citation

  • Afonso S. Bevilaqua, 2000. "State-government bailouts in Brazil," Textos para discussão 421, Department of Economics PUC-Rio (Brazil).
    • Handle: RePEc:rio:texdis:421
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    References listed on IDEAS

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    1. Mark P. Jones & Pablo Sanguinetti & Mariano Tommasi, 1999. "Politics, Institutions, and Public-Sector Spending in the Argentine Provinces," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 135-150, National Bureau of Economic Research, Inc.
    2. James M. Poterba & Jürgen von Hagen, 1999. "Fiscal Institutions and Fiscal Performance," NBER Books, National Bureau of Economic Research, Inc, number pote99-1, June.
    3. Frederico Gonzaga Jayme Jr., 1995. "Crise fiscal, federalismo e endividamento estadual," Nova Economia, Economics Department, Universidade Federal de Minas Gerais (Brazil), vol. 5(2), pages 81-115, December.
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    Cited by:

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    2. Elio Londero, 2005. "‘Market Discipline’, Lending Ceilings and Subnational Finance," Kyklos, Wiley Blackwell, vol. 58(4), pages 575-590, November.
    3. Gonzalez, Christian Y. & Rosenblatt, David & Webb, Steven B., 2002. "Stabilizing intergovernmental transfers in Latin America : a complement to national/subnational fiscal rules?," Policy Research Working Paper Series 2869, The World Bank.
    4. Mônica Mora & Fábio Giambiagi, 2005. "Federalismo e Endividamento Subnacional: Uma Discussão Sobre a Sustentabilidade da Dívida Estadual e Municipal," Discussion Papers 1142, Instituto de Pesquisa Econômica Aplicada - IPEA.
    5. Nakane, Marcio I. & Weintraub, Daniela B., 2005. "Bank privatization and productivity: Evidence for Brazil," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2259-2289, August.
    6. Bugarin, Maurício Soares, 2006. "Subnational Debt Renegotiation and Elections: Experimentation and Reputation in the Brazilian Fiscal Federalism," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 26(1), May.

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