The Brazilian government does not think the merger of Grupo Oi and Portugal Telecom has been put at risk by the latter acquiring millions of Euros worth of debt unbeknown to its Brazilian partner, according to Reuters.

Both Oi, which is the fourth-largest operator in Brazil, and state development bank BNDES, which is sponsoring the merger, criticised Portugal Telecom for failing to disclose a €897 million debt investment in holding company Rioforte.

Rioforte is controlled by Banco Espirito Santo, Portugal’s largest listed bank, which is also a major shareholder in Portugal Telecom. The investment is in commercial paper, which is a short-term investment not usually backed by any form of collateral.

Oi claims the decisions that led to the deal were made prior to the acquisition of its shares by Portugal Telecom in the Brazilian firm’s recently completed capital increase.

The representatives of two Oi shareholders stepped down from Portugal Telecom’s board at the beginning of the month, when the debt deal was disclosed.

Earlier this month Portugal Telecom tried to provide assurances by saying it would “ensure to Oi the maximum protection of the treasury application in Rioforte’s commercial paper”.

Portugal Telecom’s treasury applications in Rioforte’s commercial paper are due to mature on 15 and 17 July 2014 (€847 million and €50 million, respectively) with an average annual remuneration of 3.6 per cent.

The Brazilian government is believed to be keeping an eye on the situation with officials consulting regulatory agencies about the deal. Brazil’s securities regulator CVM and telecoms equivalent Anatel are also keeping track of developments.

It seems that the issue is unlikely to derail the merger completely, with one source quoted by Reuters as saying “both sides need the merger” in order to grow.

Luciano Coutinho, president of BNDES, said on Friday that the merger is unlikely to collapse due to Portugal Telecom’s Rioforte investments but may see the terms of the deal reworked.

Separately, Telefonica is in talks about selling its stake in Telecom Italia to ease regulatory pressure in Brazil’s mobile market. Telefonica Brasil competes directly with Telecom Italia’s TIM Participacoes.

According to Brazilian newspaper Folha de S.Paulo, the Spanish operator group is speaking to investment funds about any potential interest in its stake.

Cade, the Brazilian antitrust body, has been demanding that Telefonica reduce its stake in Telecom Italia since December. Telefonica challenged the ruling and has almost a year to resolve the regulatory issue.

In February, the board of Telecom Italia agreed safeguards to ensure shareholders are not blind-sided by any attempt to sell its Brazilian unit.