By Rogerio Jelmayer

SÃO PAULO -- Brazilian President Michel Temer plans to veto a bill that would have offered relief to indebted states but would have worsened the central government's already difficult fiscal situation, a spokesman for his chief of staff said Wednesday.

Brazil's Congress last week approved the bill, which would have eased repayment conditions for states' debts with the federal government. But lawmakers removed some austerity measures that the central government wanted to impose on states accepting the deal.

Mr. Temer plans to veto the bill Wednesday and negotiate early next year a new bill that would include some of the measures that were cut, the spokesman said.

Brazil's budget deficit stood at 9.3% of gross domestic product in November, and gross debt was at 70.5% of GDP, according to the most recent data available.

The bill vetoed by the president amounted to a giveaway to free-spending states, according to Jankiel Santos, an economist at Haitong Banco de Investimento do Brasil.

"It wouldn't make sense to approve the bill without asking the states for something in return," he said.

Lawmakers approved the measure 296 to 12 to provide debt relief for states including Rio de Janeiro and Rio Grande do Sul, which are struggling to pay salaries and other daily expenses. Many state workers are still waiting to receive their pay for the month of November.

State governments have historically relied on the national treasury to cover regional budget holes. That habit has resulted in fiscal crises at both the federal and the state level in the past, usually ending with the federal government footing a good chunk of the bill.

The worsening fiscal conditions led major credit-rating firms to strip Brazil of its investment grade last year, and economists say it will take years to see any meaningful improvement.

Write to Rogerio Jelmayer at rogerio.jelmayer@wsj.com

(END) Dow Jones Newswires

December 28, 2016 11:13 ET (16:13 GMT)

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