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UPDATE 1-Brazil's Guedes rules out using accounting trick to fund welfare program

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BRASILIA, Sept 30 (Reuters) - Brazilian Economy Minister Paulo Guedes on Wednesday appeared to row back on a government proposal that a new welfare program be funded by tapping money earmarked for future debt payments, saying his team had never intended to pay for the program that way.

The Brazilian government has countered the economic downturn brought about by the coronavirus pandemic with emergency payments to the country’s poorest.

While Brazil’s economy has not been hit as hard as its neighbors, the increased level of spending and questions over how a continued program might be funded have provoked jitters among investors.

On Monday, the government explained that it would pay for a new minimum income program called Renda Cidada in part by tapping 55 billion reais ($9.7 billion) in the budget earmarked for future court-ordered debt payments. That was ill received by financial markets concerned by Brazil’s ballooning spending.

Guedes told reporters the government was examining expenses related to the future court-ordered debt payments, which he said had seen a “rampant” increase, but that it was not a suitable way to pay for a cash transfer scheme.

He said his team was looking at ways to fuse 27 existing welfare programs to pay for Renda Cidada.

Traders welcomed Guedes’ attempts to soothe market fears over how the program will be funded, but said the government’s credibility is being eroded as it tries to expand social welfare at the same time as promising fiscal discipline.

“It’s clear that the fiscal constraint is becoming a political problem,” said a trader at a bank in Sao Paulo. “The level of debt, the need to stabilize the debt, and the social (policy) approach are not sustainable.” Brazil’s currency and stocks recovered some ground, and long-term interest rates fell a little on Wednesday.

Reporting by Marcela Ayres, additional reporting Jamie McGeever; Writing by Gram Slattery; Editing by Sandra Maler