precatorio

Dec. 3 (Bloomberg) — Brazil’s bar association said legislators are encouraging state and city governments to default on judgments against them by changing how they can settle about 100 billion reais ($58.5 billion) of unpaid legal rulings.

Congress yesterday approved a constitutional amendment, known as the precatorios bill, which sets up an auction system that allows holders of judgments willing to take the deepest discounts on their claims to be paid first. The bill effectively “sanctions default,” bar association President Cezar Britto said in a phone interview from Brasilia.

“The decision tears apart a security that should be one of the safest — a court ruling,” Britto said. “Governors now are free to commit abuses because they know court decisions won’t effectively condemn them – the amendment diminishes Brazil’s judicial system.”

The bar association plans to challenge the bill before the Supreme Court on the grounds that it conflicts with current law requiring states and municipalities to honor final court judgments, Britto said. He plans the appeal for Dec. 8.

In Brazil, investors buy such court-ordered government payments, known as precatorios, at a discount from the original creditors and often use them as collateral for funds or securities. There are 12 funds registered with the securities and exchange commission in Brazil that focus on precatorios.

“Chances are you will get a huge headache” by holding city and state precatorios, Marcos Duarte, who manages funds that include precatorios at Polo Capital Gestao de Recursos Ltda, said in a phone interview from Rio de Janeiro.

To contact the reporters on this story: Maria Luiza Rabello in Brasilia at mrabello@bloomberg.net; Andre Soliani Costa in Brasilia at asoliani@bloomberg.net.

Last Updated: December 3, 2009 12:07 EST