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Are Olympics bankrupting Rio and Brazil, or is hosting them no sweat? Maybe both

  • The Olympic Rings rise above Madureira Park on June 4, 2015 in Rio de Janeiro, Brazil.

    The Olympic Rings rise above Madureira Park on June 4, 2015 in Rio de Janeiro, Brazil.  (2015 Getty Images)

  • A bike lane that ends into space -- part of the unfinished Olympic infrastructure in Rio de Janeiro.

    A bike lane that ends into space -- part of the unfinished Olympic infrastructure in Rio de Janeiro.  ( Jose Rojas)

Shortly after the governor of the state of Rio de Janeiro, Francisco Dornelles, declared a "state of emergency" last week in a desperate attempt to get the country's federal government to step in and cover 2.9 billion reais – about $860 million – of the cost of hosting the Olympics, city mayor Eduardo Paes was reassuring the world on social media that everything, in fact, was just fine.

The state's financial condition would "in no way" affect the Rio Games, he said, which will open a little more than 40 days from now on Aug. 5.

So is the sky falling on the Rio Olympics or will the Games go off without a hitch?

Yes. No. Or maybe the best answer is, “both.”

Neither Dornelles nor Paes is lying when they proclaim doom and gloom on the one hand, and everything is fine on the other. 

In announcing the emergency, Dornelles said the "serious economic crisis" in the state – which gets a large percentage of its revenue from oil exploration grants – has brought about "severe difficulties in providing essential services" that threaten to cause a "total breakdown in public security, health, education, mobility and environmental management."

Paes, at a press conference on Tuesday, was testy about the governor's announcement. "If some place was to go broke because of Olympic obligations, it was the city, not the state," he said. “We want to demystify this story that the country is paying for the Olympics in Rio."

Part of the confusion is that the funding for the Olympics is being divided between the city, state and federal budgets with some costs getting picked up by private sources.

The city is responsible for the vast majority of the athletic venues themselves – 98 percent of which are completed, according to Paes, although a tour of Olympic Park earlier this week makes that seem like something of an exaggeration. The state’s principal responsibility is public safety – which includes security at the Games as well as the public health.

And therein lies the trouble. 

The broke state – which is running a projected budget shortfall of 20 billion reais, or $5.9 billion, and has been delaying pension and salary payments of medical and security personnel and closing schools and hospitals – is in charge of the two items likeliest to scare off international tourists, with the Zika epidemic ravaging Brazil’s northeast and the growing number of homicides, robberies, rapes and assaults in Rio.

On Sunday, two members of the Australian Paralympic sailing squad were robbed at gunpoint – not the first crime committed to a visiting athlete.

"There is the fear that an incident could happen during the Olympics,” economist Raul Velloso told Fox News Latino.

The number of officers patrolling the city streets has been cut by $590 million this year, forcing the state to ask for help of the Armed Forces, which has promised to send 15,000 soldiers to strengthen security during the Games.

On the public health side, the situation is even more dire. The Medical Legal Institute (IML), where the bodies of the victims of violence are taken for forensic study, for example, had to suspend its work in May because the company that cleaned its facility had not been paid.

Many health-industry civil servants have not received their full wages in months. 

"Rio de Janeiro [state] is broken by excessive mandatory spending and personnel expenses … and not by debt or just economic crises," economist Caio Vital said.

In the short term, Dornelles’ declaration of a state of emergency will allow the federal government to release funds to the state government quicker. At first, some 2.9 billion reais and more – much more – later on. 

Brazil's interim president, Michel Temer met with Dornelles in Brasilia on Monday to discuss the situation. They spoke about funds to be released to Rio, Finance Minister Henrique Meirelles said at a subsequent press conference. He did not give an amount that the federal government would give the state or details on the measures that the federal government intends to implement to help Rio.

Dornelles said, "No one discussed a final figure.”

Whatever funds the state gets would be used to finalize the metro line linking many of the Olympic venues in Barra da Tijuca to Ipanema, in the city’s tourist zone. They would also be used to ensure that police and service employees are paid – at least until the Games are over.

For financial experts, the decree demonstrates the size of the budget problem in Rio, which is suffering from the economic crisis that have affected the whole country – the fall in oil prices and high public spending.

According to economist Velloso, despite being a blow to the the credibility of the state government, the emergency decree is the only short-term solution to the state's financial problems.

"If you get 20 billion [reais], the state will keep paying wages on time and finish all priority projects for the Olympics, also ensuring the safety of the population," Velloso said. "Rio was likely to have a major deterioration in critical areas like health and safety without it."

But, he added, financial reforms are "indispensable" to the long term health of the city, state and country.

"You will have some progress with this money, since it will bring back economic activity that was already bouncing back, returning to a state of growth. Oil prices will get higher again, helping the state. But without cuts in spending, we will face this again."

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