Supreme Court rules over interest charged from Brazilian states

The Federal Supreme Court (STF) is expected to rule today (Apr. 27) over the request filed by some states on the use of simple interest in the amounts they owe the federal government. As it stands today, compound interest accrues on any debt incurred in the country.

In the view of experts heard by Agência Brasil, should a decision be made in favor of simple interest, consumers will have a reason to question the current method in court.

Economist Miguel de Oliveira, director at the National Association of Finance Executives (ANEFAC), explains that the difference between simple and compound interest is that the former accrues on the original amount of the debt, while compound interest applies on the adjusted value.

Oliveira notes that compound interest is widespread in Brazil's domestic economy as well as other countries'. “It applies in case of loans to buy refrigerators, houses, cars. That's how it works all over the world, but in other countries rates are lower,” he remarks. In his opinion, the Supreme Court will not allow state governments' debts to be based on simple interest. “It doesn't stand to reason, because the states themselves charge tax-payers compound interest,” he argues.

The economist also believes that the problem does not lie in the interest per se. “The issue isn't whether or not [charging compound interest] is fair. The problem is that, since interest rates in Brazil are considerably high, it makes a big difference.”

According to an estimate from the Finance Ministry, if the STF rules for simple interest, the move would leave a hole of some $114 billion in public coffers—considering the accumulated debt in the states up to December 2015.

Santa Catarina, Rio Grande do Sul, Minas Gerais, Alagoas, Goiás, São Paulo and Rio de Janeiro are among the states that have been granted a preliminary injunction to pay simple interest on their debts without being penalized.

Translated by Fabrício Ferreira