Brazil's Meirelles says states to get three-year reprieve in debt deal

BRASILIA (Reuters) - Brazilian Finance Minister Henrique Meirelles said cash-strapped states that sign up for a debt relief program would get three years to repay loans owed to the federal government and private banks as long as they commit to drastic spending curbs.

Meirelles told Globo TV's cable news network on Monday a new bill with the deal's terms would be sent to Congress on Tuesday.

The bill is vital for Rio de Janeiro state to overcome its fiscal crisis and will require states to freeze wage hikes for employees and stop new hiring, while getting them to privatize their banks, electrical utilities and sanitation companies.

States will not be able to give tax breaks or subsidies to companies struggling with a two-year recession and will have to reduce current tax breaks by 20 percent, he said.

In return, they can put off debt payments for three years.

"Any state that joins the recovery plan and carries out the adjustment measures will have a series of prerogatives," Meirelles said in the television interview.

"Debts with the government will be postponed, the payments will be suspended, and also with the private sector. All debts with the financial sector and banks will be extended on the same terms as debts with the federal government," he said.

The program will help shore up the finances of Brazilian states that are experiencing crippling budget crises because of ballooning deficits and falling tax revenues. Rio de Janeiro has not paid salaries for police and doctors since last year.

The speaker of the lower house of Congress, Rodrigo Maia, said he aimed to put the debt bill to a floor vote in the first half of March. Maia told reporters after meeting with Meirelles that its passage would require persuading lawmakers from states with financial troubles they need to tighten their belts.

President Michel Temer vetoed a debt relief bill

last year after lawmakers stripped it of austerity requirements.

The state assembly in Rio, which is in the most critical financial shape, refused to vote on spending cuts required to join the debt relief plan. Rio's government even sought a Supreme Court decision to free it from spending and debt limits.

In a surprise vote on Monday, the assembly voted to allow the privatization of the state water and sewer company, CEDAE, a key condition to land a loan from a consortium of private banks

Meirelles said it was a positive first step toward balancing Rio's books.

"Above all, it shows politicians are realizing how serious Rio's situation is and tough measures must be taken to start paying salaries, pensions and suppliers' bills again," he said.

(Reporting by Anthony Boadle; Editing by Jonathan Oatis and Peter Cooney)