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Tuesday, July 05, 2011 11:01 AM

Credit Crisis in Brazil: Consumer Loan Rates Hit 47%, Defaults Soar, Debt Service Tops 50% of Disposable Income

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Those looking for inflation and high interest rates can find them in much beloved emerging markets, especially Brazil.

Reader Otavio, from Brazil writes ...

Hello Mish

Otavio here, a Brazilian follower of your blog. Today I want to express my satisfaction as I read you latest post entitled Preposterous Statements - Jim Rogers: "No Food at Any Price"; Barton Biggs: " U.S. Needs Massive Infrastructure Program".

When I hear statements like these, it feels like the move up in commodity prices might be near the end. I cannot stress more the fact that high prices fueled by zero interest rates in developed and many emerging markets (for many years now) are a fruit of rampant speculation.

We have our own credit bubble here, which in my opinion has a good chance of busting sooner rather than later, via one or more of the following:

  1. Central Bank over-tightening local rates
  2. Slowdown in China, which would change our terms of trade and contract global capital flows to EM and Brazil (as we are suppliers of commodities to China), tightening monetary conditions here as a result
  3. Deterioration of credit crisis in Europe (and US), would also contract global capital flows and tighten monetary conditions here

I took the liberty of forwarding you a FT article about Brazil.

I think you might appreciate this as maybe a topic for future posts of yours, since you are keen in identifying and warning readers and investors of potential bubbles around the world that may be close to busting. For the record, I will say that in my opinion, Brazilian real estate, many local stocks, and our currency (the Real), are extremely overvalued as well.

Brazil Risks Tumbling From Boom to Bust

With thanks to Otavio, please consider a few highlights from the Financial Times article Brazil risks tumbling from boom to bust

Cash Flow Burden Astronomical and Rising

  • Average rate of interest on consumer loans 47%, up from 41% in 2010
  • Consumer debt service burden was 24 per cent of disposable income in 2010, slated to rise to 28 per cent in 2011. This compares with 16% for an “overburdened” US consumer and a mid-single digit reading for other emerging markets such as China and India.
  • Debt service burden for the so-called “middle class” in Brazil has now breached 50% of disposable income
  • Delinquencies in Brazil (defaults in excess of 15 days) have begun to move up rapidly, from 7.8 per cent to 9.1 per cent of total loans between December 2010 and May 2011.
  • Delinquencies are now rising at a very hectic rate. They have risen at 23 per cent in the first five months of this year in absolute terms or at an annualised rate of 55 per cent.
  • Normally credit indicators cyclically lag the economic cycle. When they begin to deteriorate before any economic weakness it usually represents a structural problem relating to underlying cash flow or underwriting weakness in the quality of credit – Brazil has both problems.

In light of facts elsewhere around the globe, it's really quite humorous to hear repeated chants of hyperinflation every time US treasury yields inch up slightly.

Brazil Targets Currency Speculators

Brazil's Finance Minister, Guido Mantega Mulls New Currency Measures
Brazil will continue to act to curb the strength of its currency, with restraining excess speculation in the futures and derivatives markets among possible options, the country's finance minister said on Tuesday.

"The government will continue to take measures to contain the over-valuation of the exchange rate ... We've taken measures on reserve requirements, we can take measures on derivatives and futures. But these are not measures we will pre-announce," Mantega told reporters.

Despite aggressive measures to curb the strength of its currency, including taxes on fixed-income inflows, the real is trading close to its strongest level against
the dollar in 12 years.

In recent weeks, foreign investors have raised their bets that the real will continue rising to record levels.

Last year, Mantega accused governments around the world of deliberately weakening their currencies to boost their export competitiveness, warning of an "international currency war."

But for Alberto Ramos, Latin America economist at Goldman Sachs in New York, Brazil is "no passive victim."

Near-zero rates in developed markets and high rates in emerging economies are drawing investment to countries like Brazil. At the same time, though, Brazil has failed or refused to contemplate measures that could ease flows, such as cutting
government spending, which makes up a whopping 40 percent of gross domestic product, he said.
No Passive Victim

I am inclined to agree with Otavio who says the Real is "extremely overvalued".

Mike "Mish" Shedlock
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