Brazil’s crisis is bad – but its state finances are even worse

In early October, protestors from workers’ unions gathered in central Rio de Janeiro. They hoped to highlight their opposition to the privatization of Brazil’s state-owned energy company, Eletrobras. But for many Brazilians, this is just the latest in a series of privatizations debated in Congress as the country tries to curb its debilitating federal and state deficits.

Brazil’s state deficits are no secret: the overwhelming majority of its states owe the federal government billions of reals, without having sufficiently productive economies to repay their debts. Just before last year’s Olympic Games, Rio de Janeiro became one of three states to declare “financial calamity,” allowing it to access extra funding but triggering further debt renegotiations.

Consequently, states are now looking at the privatization of public services as a part of new bailout deals. As many as fifteen of Brazil’s states are interested in privatizing their sanitation companies, according to Brazilian newspaper O Estado do São Paulo. Infrastructure, too – from prisons to state-specific energy companies to long stretches of highways – could go to private administrators. For the public, there are lingering fears that low-income residents will be priced out of public services as privatization sweeps through the country.

Incompetence and corruption

Brazilian state debts to the federal government have been snowballing since nearly the beginning of the military dictatorship (1964-1985) when Brazil adopted a centralized taxation system. Public bank loans became one of the most significant sources of state revenue – but resulted in states owing gigantic sums to the federal government, which didn’t undertake any concrete steps to address the problem until 1997.

Huge debt renegotiations took place under then-President Fernando...