Congress enacts the "Default Amendment Proposal" for government debt; the Brazilian Bar Association (OAB) will sue the Supreme Federal Court (STF).

The Federal Council of the OAB will file a lawsuit with the Supreme Court against the "default on court orders" PEC (Photo: Raul Spinassé / CF OAB)

The Brazilian Bar Association will appeal to the Federal Supreme Court (STF) to try to block the PEC of the " default of court-ordered debts ". The measure, which will be enacted this Tuesday (9) by the National Congress in the form of Constitutional Amendment (EC) 136, establishes the practically indefinite installment of state and municipal court-ordered debts, among other benefits.

The OAB Federal Council is expected to file a Direct Action of Unconstitutionality against Constitutional Amendment 66/2023 with the Supreme Federal Court (STF) this Tuesday. In the lawsuit, the OAB argues that the measure creates a cycle of institutionalized default, shifting the costs of already established judicial decisions onto future generations.

"The OAB is going to the Supreme Court because this PEC blatantly violates the Constitution, undermines the authority of the Judiciary, and institutionalizes the State's failure to pay its own citizens," said the Order's president, Beto Simonetti.

What EC 136 establishes from now on

Precatórios are government debts owed to individuals and companies that have already been recognized by the courts at all levels. In addition to the indefinite installment plan, the new Constitutional Amendment 136 establishes a limit on the amount of current state and municipal revenue that must be allocated to paying these debts, without establishing a maximum term for their rollover.

Another piece of bad news for creditors is the change in the correction index for court-ordered debts. Until now, the applicable rate was the Selic rate, which stands at 15% per year. With the enactment of Constitutional Amendment 136, it will be the IPCA plus 2%, that is, the inflation rate plus 2% per year—currently equivalent to just under 7.5%.

The federal government will also benefit from EC 136.

The federal government was not left without a favor from the National Congress, having its court-ordered debts excluded from the fiscal framework's spending limit starting next year. This measure will bring relief to the government's finances, which, as early as 2027, was expected to run out of room for expenses such as the education and healthcare minimums.

The measure contradicts a previous decision by the Federal Supreme Court (STF), according to which court-ordered debts should return to the government's spending limit as early as 2027. Furthermore, PEC 66 – now converted into EC 136 – still establishes that court-ordered debts be gradually incorporated into the primary result: with 10% starting in 2027, increased by 10% annually.