BRASILIA, Nov 5 (Reuters) - The Brazilian Senate approved a bill on Wednesday that lowers the debt burden of states and municipalities, opening the way for regional governments to spend more at a time of growing concern about the country's fiscal health.
The bill, which was supported by government lawmakers as well as the opposition, will add pressure on newly re-elected President Dilma Rousseff, who has promised to rein in public spending, slow inflation and limit the country's rising debt burden to regain the trust of investors.
The bill changes the benchmark index used to calculate the interest that regional governments pay on debt to the federal government. It also allows the federal government to readjust state and municipal debt back to the date each state or municipality signed a debt-renegotiation deal with the central government.
Going forward, the new terms allow state and municipal debts to be adjusted by the country's benchmark consumer-price index, known as the IPCA, or by the central bank's Selic benchmark overnight rate, whichever is lower. Previously the debts were adjusted by the country's IGP-DI index, a measure of changes in both wholesale and consumer prices.
The retroactive adjustment of debt can only be made using the Selic index.
"The change in the index will generate some financial relief for the states and they will use it to spend more, which will mean a lower primary surplus and a more expansionist fiscal policy," Alberto Ramos, senior economist with Goldman Sachs in New York, said on Wednesday before the vote.
The finance ministry has declined to answer repeated requests from Reuters for an estimate on the potential impact of the bills on spending and total government debt.
The federal government may have to forgo about 187 billion reais ($74.4 billion), or more than 1.5 percent of gross domestic product, in future debt payments through 2040, according to Treasury data provided to the country's federal-auditing council known as TCU.
Fiscal expert Felipe Salto with Tendencias Consultoria told Reuters that the retroactive nature of the bill means the federal government will effectively pardon more than 50 billion reais in debt from states and municipalities.
Back in April, the government was able to delay the vote on the bill. At the time, Finance Minister Guido Mantega said this could be misinterpreted by markets as a green light for regional governments to spend more.
Shrinking fiscal savings by states and municipalities have contributed to the severe erosion of the country's finances since Rousseff took office in 2011.
Government accounts have deteriorated so much under Rousseff that Brazil risks posting its first full-year primary budget deficit in nearly two decades this year. Ratings agencies have threatened to downgrade Brazil's credit if the government fails to staunch the fiscal bleeding.
A primary surplus or deficit refers to the difference between spending and revenue before payments on debt are included. A deficit would be an excess of spending and signify that Brazil's overall debt will rise.
Lawmakers from the governing Workers' Party have said Rousseff will not veto the legislation.
Several governors and mayors have said a lower debt burden will give them room to increase investment in their regions.
Brazilian law does not let states and municipalities sell debt because of federal government-imposed curbs.
$1 = 2.5134 Brazilian reais Reporting by Alonso Soto; Editing by Jeb Blount and James Dalgleish