Brazilian President Michel Temer is turning to an unlikely source to help solve his country’s fiscal crisis -- deadbeat taxpayers.
Temer, 75, who was sworn in after President Dilma Rousseff’s Aug. 31 impeachment, wants to turn a chunk of uncollected taxes into securities and sell them to investors, an idea that only a few governments have ever tried. If it works, the plan could quickly raise as much as 70 billion reais ($22 billion) for his cash-strapped government and create a new market in Brazil. If done right, the idea could catch on around the world.
"The idea is to simply anticipate revenue that would be granted anyway," said Brazilian Senator Paulo Bauer, who’s sponsoring a bill in parliament that’d pave the way for such securitizations. "This is a very good project because the debtor will still owe to the states or the federal government. The debtors will not be paying banks, they will be paying the Treasury. Then the Treasury will pay the banks."
Despite some buyer-beware warnings from investors, the plan has the backing of Temer’s new administration. Given the hole facing the nation, you can hardly blame them. Estimates on the size of Brazil’s outstanding tax debt vary wildly, with Budget Minister Dyogo Oliveira placing the pot at more than 1 trillion reais. Still, gaps in tax data, records and systems mean that a large chunk of that is effectively noncollectable.
“For the government it makes total sense, but from an investor point of view and me personally, I would look at those bonds, but I would be very careful,” said Simon Nocera, chief investment officer at Lumen Advisors LLC, which advises on about $1.6 billion in assets.
Brazil is far from the only country that struggles to collect taxes. Similar efforts by countries like Portugal, Belgium, Italy and Greece were limited mostly to one-offs due to European Union national-budget restrictions once it was determined the securities would be considered new sovereign debt, according to Moody’s Investors Service.
From the Mediterranean to Southeast Asia, and in many places in between, revenue collection -- or lack thereof -- poses a constant challenge, and makes Brazil’s experiment worth watching. Italy, plagued by low tax collection, has been been told by experts its system needs an urgent fix. Mexican authorities recently got new audit powers and credit card use plunged as citizens turned to cash to avoid paper trails. Greek deadbeats owe billions of euros to their cash-strapped government.
“I definitely think this is something that could replicated to other places, as long as the legal framework” is there, said Ricardo Leoni, the head of debt capital markets in Brazil for JPMorgan Chase & Co.
Brazil’s federal government would sell about 120 billion reais of uncollected tax debts and state governments would sell about 100 billion reais, receiving the cash upfront from investors, Bauer, the senator, said. Investors such as banks and credit managers would buy the debt at a discount of about 40 percent, while the government would still be responsible for collecting it, then paying investors. It would include debts of companies that have agreed to repayment programs.