🦺 Debt and disaster

Good morning! Today, severe climate events could see states and cities delay their federal debt payments. Congress is getting more and more distant from Lula. And Car Wash takes yet another defeat.

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Climate emergency could leave federal coffers depleted

Almost half of the 108 Brazilian municipalities in debt to the federal government are considered to be at a high or very high risk of floods in the coming years, according to projections from the Science and Technology Ministry, which The Brazilian Report’s Isabela Cruz and André Chiavassa crossed with financial data obtained by Fiquem Sabendo, a freedom of information advocacy group. 

State of play. A recently passed law authorizes the government to postpone debt repayments by up to 36 months from states and municipalities affected by “extreme climate events” and with states of public calamity recognized by Congress. 

• The law was passed to help the state of Rio Grande do Sul, which faces an enormous bill to rebuild the state’s infrastructure after the devastating floods of the past couple of weeks. Brazil’s fourth-largest state economy, Rio Grande do Sul also has the fourth-largest debt to the federal government at more than BRL 95 billion (USD 18.54 billion).

• São Paulo, Rio de Janeiro, and Minas Gerais — the three biggest state economies — also have the largest debts to the government. Combined, these four states account for almost 90 percent of all state debt to the federal purse.

 Why it matters. As is, municipal accounts are already in poor shape. The 12-month consolidated primary result of all municipalities has plummeted in recent months. Between 2021 and 2023, the rate of municipalities in the red jumped from 7 to 49 percent. 

• The Rio Grande do Sul case is a testament to how destructive extreme climate events can be. And, as we showed on Friday, cities across the country face climate risks that could come at massive human and financial costs.

Major debts, major risk. The two most populous states in Brazil, Minas Gerais (home to the most cities with federal debt) and São Paulo (which has the highest total municipal debt, BRL 1.5 billion) have a combined 58 cities with federal liabilities — 27 of which face high or very high risk of floods.

Renegotiations. Even before the Rio Grande do Sul tragedy, states have been in talks with the Finance Ministry and Congress to renegotiate their liabilities. The government reportedly wants to introduce a bill in that direction later this year. For municipalities, President Luiz Inácio Lula da Silva on Tuesday said his government will present new debt rules to “alleviate” the pressure on mayors.

Worsening vibes

A new Quaest poll with lawmakers suggests that Congress’s views on the Lula administration are souring. The poll says 52 percent of House members believe the president is taking the country in the wrong direction, with 38 percent saying he is going in the right direction.

 Why it matters. That is yet another red flag for the government, which has had a rocky relationship with Congress. Although Lula scored major victories in Congress last year, the approval of government-proposed bills and provisional decrees was lower than in previous presidential terms.

State of play. Congress has gained more power over chunks of the budget, which allows lawmakers to pour money directly into their constituencies in order to improve their re-election odds. 

• Easier access to that money has reduced the cost of not supporting the government of the moment — and has required presidents (not just Lula) to use enormous amounts of pork to get their way ahead of important votes.

Yes, but … The government has fumbled the ball when it comes to its relationship with Congress. Its political liaison, Institutional Relations Minister Alexandre Padilha, is the target of complaints from allies and opposition members alike. 

• Moreover, even the Workers’ Party bench has voiced grievances against the government, with lawmakers saying they are not being listened to. In a year and a half, Lula has reportedly not met with his party’s own House bench (something he used to do during his previous presidential terms of 2003-2010).

Outlook. Things may not get much easier from now on. This October, Brazil has municipal elections — and the closer the 2026 general elections get, the harder it may be for Lula to draw support from a conservative Congress where hundreds of lawmakers will support one of his challengers.

Another Car Wash defeat

The Supreme Court issued separate decisions that benefited former defendants convicted for crimes unveiled by Operation Car Wash, the almost decade-long anti-corruption task force that unveiled deeply-rooted corruption schemes within major construction firms, state-controlled companies, and every major Brazilian political party.

• Justice Dias Toffoli, who has made it his mission to reverse Car Wash decisions (suspending fines and calling the entire operation a “mistake”), nullified all rulings against Marcelo Odebrecht, the former CEO of Odebrecht (now Novonor), once Latin America’s most powerful construction conglomerate.

• Separately, a panel of justices extinguished a corruption conviction against José Dirceu, President Lula’s former chief of staff and strongman. Mr. Dirceu has been free for years; in essence, the decision helps him in his quest to recuperate his political rights in 2026 (he has other appeals pending).

Context. Justice Toffoli said judges and prosecutors colluded against Mr. Odebrecht, committing several illegal acts. In the case of Mr. Dirceu, justices considered that the charges against him had already reached the statute of limitations.

 Why it matters. Operation Car Wash was laden with procedural errors and multiple instances in which due process was not observed. Also, the operation at multiple times appeared to act ideologically, trying to put its thumbs on the political scale (against the left). 

Yes, but … That is now being used not only to reverse tons of judicial decisions, but also to rewrite history, ignoring that while the operation was problematic, it did unearth massive corruption schemes.

• It caught every major political party with their hands in the cookie jar of dirty money. It also showed that corruption was not an eventuality of doing business for major construction groups, but rather the core of their business models. 

• The Odebrecht group, for instance, had a department dedicated to managing the bribes they paid to politicians.

Quick catch-up

The Superior Electoral Court unanimously upheld a lower court verdict acquitting Senator Sergio Moro from accusations of illegal campaign financing that could have led to his impeachment. 

The Supreme Court on Tuesday accepted charges against far-right Congresswoman Carla Zambelli and notorious hacker Walter Delgatti for breaking into Judiciary systems, making them both defendants. The investigation was initiated following an award-winning story by The Brazilian Report.

Brazil suspended a rice buying auction after other Mercosur countries jacked up their prices. The government fears that crop disruptions caused by the floods in Rio Grande do Sul state, the country’s biggest rice producer, will increase food inflation.

Brazil gained 26 points in the freedom of expression score by NGO Article 19, rising to 81 on a 100-point scale in the first year after far-right former President Jair Bolsonaro left office. Mr. Bolsonaro was notorious for harassing members of the press.

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