23 de fev de 2011

Brazil may be heading for a subprime crisis By Paul Marshall - Financial Times

Brazil may be heading for a subprime crisis

By Paul Marshall

Published: February 21 2011 15:02 | Last updated: February 21 2011 15:02

Brazil has been on a credit binge – over the past 5 years credit growth has run at 2.4 times nominal gross domestic product. This compares with 2, 1.6 and 1.2 times for Russia, India and China respectively.

Normally this isn’t a problem, as leverage is rising from a low level and the ratio of loans to GDP is “only” 46 per cent; this compares with private sector debt in the US at 165 per cent of GDP.

However, the problem lies with the burden this debt is imposing on borrowers. 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 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.

For consumers specifically, the ramifications are serious as the debt service burden has risen to 24 per cent of disposable income and is set to rise further as rates push higher. We expect the burden to rise to an exorbitant 30 per cent by 2012. To put this into context, the US consumer “blew up” when the debt service burden hit 14 per cent (with a current read of approximately 12 per cent). 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.

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.

There are also ominous signs of what economist John Kenneth Galbraith called the “bezzle” beginning to appear above the surface. In November 2010, a small bank, Panamericano, was found to be fudging its credit losses in consumer lending – the bank was recapitalised overnight. But over the year the stock fell by 62 per cent and it was recently sold to BTG Pactual in a “distress” takeover as the central bank found further anomalies in its accounting practices.

While there are parallels with the US there are also unique features in Brazil. Risk management infrastructure has largely been missing in Brazil’s credit build up, with a “positive” credit bureau still not yet approved owing to consumer protection issues (a positive credit bureau shares credit history of all customers whereas negative bureau shares information for customers only in default, typically this information comes too late). This has enabled borrowers to build multiple lines of credit without the lenders’ knowledge, especially as most loans are “unsecured” and there is no collateral involved.

Brazil is in this spot from a financial standpoint due to inefficiencies in the financial system. The operating expense to assets ratio of the Brazilian banking system is a staggering 4.2 per cent compared with 1.1 per cent and 1.6 per cent for Chinese and Indian banks respectively, and this large expense base keeps the cost of credit abnormally high.

From a macro standpoint, a low savings rate and an overvalued currency are putting pressure on growth rates and on the competitive position of the economy – hence the drive to push leverage into the system in order to prop up growth rates in line with Bric peers. But the reality is that countries like China and India have been more successful in driving rapid growth rates while retaining high savings rates and more competitive currencies. The issue for Brazil is that the country needs to rebalance towards higher ratios of savings and investment.

Brazil’s history is littered with accidents relating to weakness in the external accounts, high inflation and devaluations of the currency – as recently as the 1990s Brazil faced a similar set of issues, sparking a 65 per cent decline in Brazilian equity markets between end 1997 and end 2002 in US dollar terms.

Brazil’s policy making has been much strengthened over the past decade and the country has been rewarded by the bond markets. But Brazil will need some skilful policy making if it is to manage down its current credit bubble without losing control. Any slowdown in the economy and related rise in unemployment rates could create a self re-enforcing liquidity spiral as credit is extracted from the system.

This will also be an important economy to watch for global investors: Brazilian financial markets have been a great beneficiary of the global disinflation trade but unfortunately for Brazil, global interest rate rises on account of more generalised inflationary pressures have come at the wrong time for an economy that may have been drinking with too much abandon in the disinflationary saloon.

Paul Marshall is CIO at Marshall Wace and co-manager of the Eureka Fund. The piece was co-authored by Amit Rajpal, portfolio manager of MW Global Financials Funds