Brazil mulls emergency loan to Rio de Janeiro ahead of Olympics

An aerial view of the 2016 Rio Olympics Park in Rio de Janeiro, Brazil, April 25, 2016. REUTERS/Ricardo Moraes

BRASILIA (Reuters) - Brazil is considering an emergency loan to the cash-strapped state of Rio de Janeiro as it prepares to host the Olympic Games in less than two months, two senior government officials familiar with the situation told Reuters.

The loan would be backed by the state's participation in local companies and could be extended to the states of Minas Gerais and Rio Grande do Sul, which are struggling to pay employees and pensioners as a crippling recession slashes tax revenues.

Although the city of Rio de Janeiro has enough money to complete the infrastructure for the Olympics, a financial crisis in the state threatens to disrupt public services during one of the world's biggest sporting events, which starts on August 5.

Hit hard by the recession and drop in crude prices, the oil-producing state faced its worst ever public health crisis this year when unpaid doctors and nurses walked out of hospitals and clinics were left nearly empty, without syringes and alcohol.

The Rio Olympics, the first held in South America, has been marred by political turmoil and an outbreak of the mosquito-borne Zika virus that has been linked to brain malformation in babies in Brazil.

"These states need cash injection. There is no other way," said a member of the government's economic team who asked not to be named to speak freely. "These loans will be backed by states' assets such as banks, utilities, gas and sanitation companies."

The three states would transfer their stakes in some state companies to the federal government, which could in turn sell them to private investors as it did during the last states' debt restructuring in the late 1990s, one of the sources said.

Another source involved in the talks said the amount of the loans will depend on how much debt relief the government can give other states also under fiscal distress.

Brazil's 27 states and federal district resumed talks on Thursday with the government of interim President Michel Temer to seek relief on their debts that amount to a staggering 11.2 percent of gross domestic product.

It is a tricky situation for Temer, who in May replaced suspended President Dilma Rousseff while she stands trial in the Senate for allegedly breaking fiscal rules. His government faces a severe fiscal crisis of its own that cost the country its hard-won investment grade rating late last year.

The finance ministry press office declined to comment. The finance secretary of Rio de Janeiro could be not be immediately reached for comment.

The finances in Rio de Janeiro have deteriorated so much that the state missed debt payments to a French development bank and the Inter-American Development Bank last month, in what Moody's Investor Services called a "credit negative for all of Brazil's states."

The state ramped up its payroll during the years of high oil prices with the expectation that the discovery of massive crude reserves off its shores would keep its finances in order.

Now the state is cutting social programs, eliminating secretariats and raising taxes to plug an expected budget deficit of 19.9 billion reais (£4.85 billion) this year.

The secretary of finance of Rio Grande do Sul, Giovani Feltes, confirmed the negotiations for the loans, which he said will be used only for investment, but will give his state a much-needed breather.

"This loan will not go to current expenditures because the law doesn't allow us to use loans to pay our employees," Feltes said in a phone interview. "Obviously this (loan) would improve out fiscal situation."

He said all the 27 states are proposing to the government a two-year moratorium on debt payments and a retroactive reduction of debt interest dating back to the 1998 debt restructuring.

(Reporting by Alonso Soto and Marcela Ayres; Editing by Daniel Flynn and Chizu Nomiyama)

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