Political Risk Latin America Blog @PolRiskLatam

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

Posted in News and Articles, Political Risk by politicalrisklatam on February 22, 2011

by Merco Press News, February 22nd, 2011.

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’. (continue reading… )


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