MercoPress. South Atlantic News Agency

FT warns Brazil could be approaching a “US like sub-prime” situation

Brazilian banks charge real interest rates of 20/25% on consumer loans

The Financial Times warns that in spite of the current optimism about the performance of the Brazilian economy, the country could be heading to a ‘sub-prime’ crisis ‘worryingly’ similar to that experienced by the United States.

The article by Paul Marshall argues that Brazil has been living on a credit binge for the last five years with credit expanding 2.4 times nominal GDP. This is not a dangerous ratio because in Brazil loans to GDP are still low by industrialized countries standards, 46%. (In India and China the credit expansion vs GDP growth ratio is 1.6 and 1.2).

But in Brazil the problem is that with a manageable 6% inflation, Brazilian banks charge an average (punitively expensive) lending rate of 25% and in consumer lending 30%. This means real interest rates between 20/25% compared to 1 to 3% in most countries.

“The ramifications are serious as the debt service burden has risen to 24% of disposable income and is set to rise further as rates push higher” and could reach an ‘exorbitant 30% by 2012’.

FT says that to put this into context “the US consumer ‘blew up’ when the debt service burden hit 14% (with a current read of approximately 12%). In other words, “the Brazilian consumer has twice the debt load from a cash flow perspective relative to a US consumer who is still widely regarded as being over leveraged”.

Finally the situation in Brazil is “worryingly similar to the sub-prime crisis in the US: a lot of credit is being pushed by the banks at high rates to consumers who ultimately won’t be able to service the debt”.