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Capital Markets

Precatorios: Brazil faces public funds default

Local governments under pressure to service judicial payments debt; Lawyers concerned about possible technical default

Flavio Brando, Machado Meyer

"All the people in New York were amazed to hear of this situation"

Flavio Brando, Machado Meyer

Brazil is heading towards an official default and unilateral restructuring of government judicial securities. The securities, commonly referred to as precatorios, are orders issued by local courts for government institutions to pay damages, contractual differences, expropriations and other monetary awards. Lawyers suggest there is up to $100 billion in outstanding precatorios. "No reserves and no provisions appear in the public balance sheets for precatorios," says Flavio Brando, a member of the Brazilian Bar association and partner at law firm Machado Meyer. "The federal treasury department in Brasilia has failed to book and publicize the existing and potential precatorios debt throughout the country, because it would put a stain on their otherwise excellent track record, and, much worse, it would compromise the politicians’ statements that Brazil enjoys a remarkable surplus in its public accounts."

The government began to tackle the potential problem in 2006, starting work on a law known as PEC 12.

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