Cuts to high-cost debt help Brazil ease fears over bubble

By Guillermo Parra-Bernal, Reuters

SAO PAULO–Brazilian borrowers are sobering up after a three-year spending spree, easing fears of a credit-fueled bubble but also turning off an engine just as Latin America’s largest economy badly needs a boost. Brazilians are increasingly refinancing overdraft and other costly loans as stubbornly high inflation drives up debt-servicing costs, central bank data showed last week. Policymakers expect loan defaults to start falling early in 2012 after hitting a two-year high in November. Just a few months ago, a rapid surge in lending was stoking concerns that Brazil’s decade-old economic boom could be derailed by a U.S.-style credit meltdown. The price of Brazilian bank stocks dropped 20 percent last year, partly on worries that borrowers were taking on too much debt, too quickly.

Those fears now look overblown as consumers shift into deleveraging mode and Brazil’s economy — which not so long ago appeared to be overheating — cools dramatically. Some analysts say the deleveraging, a synonym for debt reduction, is good news long-term for the economy.

“The balance of risks has become more favorable, helping to put any bubble or asset quality fears to rest,” said Roseli Machado, who oversees about 5.2 billion reais (US$2.8 billion) in assets for Fator Administradora de Recursos in Sao Paulo.

The deleveraging, however, is leading to concerns that after screeching to an abrupt halt in the third quarter, the economy may have difficulty regaining momentum in the new year and could even slip into a recession if there is an external shock, possible from weakness in China or Europe. The trend poses a policy dilemma for President Dilma Rousseff, who used her nationally televised Christmas address to urge Brazilians to keep spending to rekindle the economy. At the same time, Brazilian officials are well aware that debt reduction is key to paving the way for sustained growth. Indeed, a more conservative approach to borrowing among consumers could prevent the Rousseff administration from having to take painful policy decisions if the economy shows signs of overheating again. Some economists say Rousseff could kick-start growth more effectively by allowing borrowing to cool and instead taking measures to boost manufacturing and investment. As Brazilian households become less indebted, their spending may still grow but at a slower and much healthier pace than in 2009, when a series of tax and interest-rate cuts fanned a credit-fueled spending frenzy. Consumer debt, which in November rose at a 15 percent annual pace, had grown at double that rate at the start of 2011. “This is a very positive development and supports the case for a few months on the same direction,” said Alexandre Gartner, head of equity research at HSBC Securities in Sao Paulo. Instead of spending year-end bonuses on home appliances and travel packages, more Brazilians are repaying debt, according to local credit research company Serasa Experian. That’s a wise move in a country where borrowing costs remain among the world’s highest, despite a recent string of interest rate cuts.

The sum of overdraft and credit card loans, which carry annual rates of up to 200 percent, fell in November for the first time in four months, to 57.24 billion reais. Moderate growth in standard consumer loans indicates that borrowers are migrating toward cheaper forms of credit.