Governors of Rio, Minas Gerais, and Rio Grande do Sul threaten to reject the program
01/17/2025
A day after President Lula signed into law the State Debt Payment Program (PROPAG) with key vetoes, tensions between the federal government and state administrations escalated on Wednesday (15). While the National Treasury defended the program, opposition governors sharply criticized the changes.
The harshest criticism came from governors Cláudio Castro (Rio de Janeiro), Romeu Zema (Minas Gerais), and Eduardo Leite (Rio Grande do Sul). Leading opposition states and some of Brazil’s largest debtors, these governors oversee administrations under the Fiscal Recovery Regime (RRF), established in 2017 to assist states in severe financial distress.
According to the presidency, Mr. Lula vetoed provisions that could impact the federal government’s primary fiscal balance. One of the vetoed measures would have allowed entities joining PROPAG to be exempt from meeting the targets and obligations of the Fiscal Recovery Regime. This veto was considered the most significant by the states.
Introduced by Senate President Rodrigo Pacheco and approved by Congress, PROPAG aims to renegotiate state debts with the federal government. The program allows payments over 30 years with real interest rates between 0% and 2% annually. The terms depend on asset transfers from states to the federal government, contributions to the Federative Equalization Fund, and investment commitments from state governments.
Governors now hope Congress will override the vetoes in the coming days. If lawmakers fail to restore the original provisions, governors have threatened not to participate in the debt renegotiation program.
States push back
Rio de Janeiro Governor Cláudio Castro said his state is evaluating whether to join PROPAG. He noted that Rio is reviewing its assets, including properties and credits, and exploring alternatives such as creating a real estate fund to address its nearly R$200 billion debt. “We’re conducting a thorough analysis to see how far Rio can go under this new reality without jeopardizing salaries, public accounts, or anything else,” Mr. Castro said during a press conference at the Guanabara Palace.
Mr. Castro described the vetoes as “disloyalty” and “100% political,” arguing they disadvantage states governed by Mr. Lula’s political opponents. “This isn’t a political war—it’s a federative issue. But I’m certain there’s a strong political component in the federal government’s stance,” he said.
Minas Gerais Governor Romeu Zema said his state, with debts of R$163 billion, will not join PROPAG if the vetoes remain. “We hope these vetoes are overturned. Otherwise, this plan won’t work—it’ll be worse than what we already have. If it remains as mutilated as it is, we won’t participate because it’s worse than the RRF,” Mr. Zema said. He also noted that he is coordinating with Governors Eduardo Leite, Cláudio Castro, and Ronaldo Caiado (Goiás) to lobby Congress to overturn the vetoes.
The National Treasury dismissed the governors’ criticisms, arguing that they do not reflect the approved legislation. National Treasury Secretary Rogério Ceron emphasized that states can remain in the RRF while joining PROPAG. Mr. Ceron estimated that the program would cost the federal government around R$20 billion if all states participate.
Despite the short-term fiscal impact, Mr. Ceron said the program provides long-term solutions for state debt, enabling resources to be redirected to areas like education through savings on interest payments.
He said that states remaining in the RRF while joining PROPAG would retain benefits such as federal guarantees for loans with private or multilateral institutions. However, they would continue to face strict spending limits tied to inflation. States leaving the RRF would lose federal guarantees but gain more flexibility with less restrictive spending rules.
“This program resolves debt issues for all states willing to join PROPAG. There might be short-term pressures for states leaving the RRF, but they have the option to stay and many have accumulated reserves to manage their obligations,” Mr. Ceron said.
Rio Grande do Sul’s Finance Secretary Pricilla Santana said the state will not join PROPAG due to Mr. Lula’s vetoes, citing increased fiscal burdens, especially after 2024’s devastating floods. “Rio Grande do Sul doesn’t have the economic or financial capacity to join PROPAG—it’s not in our interest,” Ms. Santana said.
She added, “My pragmatism dictates that I must address the state’s finances based on what is currently certain and concrete: Complementary Law 206 and the RRF. Politically, I know the governor will work hard to overturn the vetoes, and I hope for that outcome.”
*By Jéssica Sant’Ana, Guilherme Pimenta, Paula Martini, Victoria Netto e Cibelle Bouças — Brasília, Rio de Janeiro, and Belo Horizonte
Source: Valor International