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The debate with regards to a credit bubble in Brazil was further fuelled by recent comments in the Financial Times made by Paul Marshall, CIO at Marshall Wace and co-manager of the Eureka Fund, that – as a result a rapid credit growth which has exceeded Russia, India and China – Brazil is on the course of a ‘sub prime’ type crisis witnessed in the USA in 2007.  His concerns lie in relation to the burden of debt in relation to borrowings, stating: “in spite of a fall in inflation to a manageable rate of 6 per cent, the banks in Brazil charge an average lending rate of approximately 25 per cent and, in the case of consumer lending, the rates are well in excess of 30 per cent. This means the Brazilian borrower base is paying ‘real’ interest of circa 20-25 per cent against a norm of 1-3 per cent in most countries – borrowing in Brazil is punitively expensive.” (See the original article here).

Perhaps the sign of an overheating finance system that several commentators have been warning about, the comments subsequently caused a stir in the Brazilian media with a number of leading figures from finance related industries voicing their opinions in an article in the Estadão newspaper.

Miguel de Oliveira, vice-president of the National Association of Finance, Administration and Accountancy (ANEFAC) stated that it is not justified to compare the credit systems of the USA with Brazil on the basis that the latter is considerably more immature as well as the fact that the banks engage in strict controls on lending levels – which do not exceed 30 percent of earnings (a process that did not occur prior to the sub prime crisis in the USA).

Another difference claimed by Luiz Rabi of Serasa Experian was that – whilst Brazilian interest payments are high – they are always fixed and do not therefore oscillate against the behaviour of the economy.  Rabi indicated that delinquencies in Brazil remain low which he believes is a sign that the banks are not being frivolous in their lending practices and that borrowers are meeting their commitments comfortably.  He further claimed that the article was not based on any new findings or investigations and much of the evidence referred to was already very apparent.  On the point that was stated by Marshall that the rates of interest payments are considerably higher in Brazil, Rabi indicated that many banks in countries worst hit by the credit crisis were not profiting enough from low interest rates and so started lending in the sub prime market (where borrower pay rates were higher) which eventually backfired.  Brazil, on the other hand, places obligations on the borrower from the outset and has strict measures in place to not lend to those who have tarnished credit ratings (the larger banks operate, on average, at 9.5 percent above the recommended Basel Ratio).

Luís Miguel Santacreu, analyst at the Austin Ratings agency indicated that the FT comments failed to take into account the role of Brazil’s Central Bank which, recently being taken over by new President Alexandre Tombini, has clear macro-prudential procedures in place which pay close attention to potential distortions in the market.  He quoted an example of recent measures that have been instilled which effectively freeze the expansion of vehicle credit and also (referring to the hyper-inflation days Brazil experienced in the late 1970s and early 80s) stated that: “the banks themselves have learnt from their experiences of the past.”

With regards to housing finance, as discussed in our recent blog post on the Brazil real estate bubble debate, João da Rocha Lima Jr., Professor of Real Estate at the São Paulo Polytechnic University stated at a conference conducted by the development company BNCORP that: “artificial demand is created when people buy in the hope of appreciation with no intention of use. In such a situation, demand is far beyond what is intended to be bought for real use and it is then very possible to have artificial growth rates and consequently a bubble.  These conditions do not exist in the Brazilian real estate market today.”