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It's a very thin reed, but some
economists and money managers are clinging to the hope that the developing
world, having avoided the disastrous borrowing binge of the US, Europe, and
Japan, will be the engine of growth in the coming decade. China's reserves
and Brazil's natural resources, so goes this reasoning, will stabilize an otherwise
unstable financial system while generating lots of new investment
opportunities to replace exhausted developed-world stocks and bonds.
Nah. Those pictures of Chinese ghost
cities are all you need to know about that country's capital allocation -- and
the fact that they own a trillion dollars of T-bonds and are increasing their
holdings of euro bonds is not a plus.
Now Brazil, which seemed to be
finally living up to the potential of its land and people, is revealed to be
acting like, sigh, America:
Brazil's boom teeters on personal credit bubble
Like many of the 40 million
Brazilians who have joined the middle class since 2003, he got a taste for
American-style consumption and dived headlong into the enticing world of easy
credit, once available only to the wealthy.
He defaulted three times in four
years. Now he's in over his head again, struggling to provide for his wife
and 4-year-old daughter.
Xavier is one more debtor adding to
fears that the economic boom in Brazil may be partly built on a bubble in
personal credit, even with interest rates on credit cards often topping 200
percent. Economists worry that if it pops, it could severely damage an
economy that has come through the global downturn better than almost every
other nation.
"The amount I owe keeps growing.
I pay, but I can't stop this snowballing of the debt. The interest each month
is too high," said Xavier, pointing to the latest credit card bill,
showing he still owes $2,200. "I've tried to learn from hard experience
how to better manage my debt, but I'm too far behind."
Brazilian leaders have praised newly
empowered consumers such as Xavier as drivers of the nation's economic rise.
Their spending helped the country emerge from the global economic crisis at a
time when people in other countries pulled back.
Now some economists fear those same
consumers are being buried by sky-high lending rates. They worry that if debt
erodes middle-class buying power, Brazil could face a recession.
The interest rate on credit cards in
Brazil's financial hub of Sao Paulo averages 238 percent, according to a
study conducted earlier this year by Fecomercio, a
federation of commerce. That means carrying a balance of $1,000 for a year
results in a $3,380 tab. That cost is expected to rise, with the Central Bank
of Brazil likely to raise interest rates to battle inflation.
Before, people such as Xavier, who is
24 and makes about $2,000 a month driving his cab, couldn't get credit.
Brazil was beset by hyperinflation in the 1990s and economic turbulence in
the early 2000s.
When the nation brought its economy
under control, banks started expanding credit offers. The number of bank
credit cards in circulation has tripled to 150 million in the past eight
years.
Economists say many people here are
getting credit cards without knowing how to manage the debt. But for those
who want to buy things and don't have cash on hand, there is no alternative.
The sky-high interest rates mean
Brazilians must pay off their cards every month or quickly drown in debt.
For the first six months of this
year, the number of Brazilians in default was up 22 percent from the same
period in 2010, the biggest jump in nine years, credit rating agency Serasa Experian said. Private economists say one in 10
Brazilians is in default.
By the end of the year, the Central
Bank expects 28 percent of Brazilians' disposable income will go toward
servicing debt, compared with 16 percent in the United States and less than
10 percent in other developing nations.
Consumer confidence in Brazil sank to
a two-year low in June, according to the latest survey from the National
Industry Confederation. That's mostly because rising interest rates and inflation
of 6.71 percent, above the government's target ceiling of 6.5 percent, are
pummeling poorer Brazilians.
That all this is happening while
Brazil's unemployment is at a historic low and the overall economy remains
strong particularly worries some economists, who expect the situation to get
worse as Brazil's growth slows. The economy, which grew 7.5 percent last
year, is expected to slow to 4 percent growth this year.
"I wouldn't underestimate the
potential that we see a recession in Brazil in the next three years as a
result of this," said Neil Shearing, senior emerging markets economist
at Capital Economics in London.
Finance Minister Guido Mantega denies that Brazil's economy is overheating and
fueling a credit bubble. The government's most recent economic review noted
that private-sector credit debt is equivalent to 54 percent of Brazil's total
economic output -- well below the 120 percent in China and South Africa,
where interest rates are much lower.
Central Bank President Alexandre Tombini told a Senate
panel he thinks the number of consumer defaults in Brazil should level off
and then drop as Brazilians become more prudent with credit.
David Beker,
head of Latin American economic and fixed-income strategy at Bank of America
Merrill Lynch in Sao Paulo, said Brazil's economy is adjusting to the rapidly
growing role of credit, "but from that to say there is a bubble or that
it is going to burst is an exaggeration."
The Central Bank could take more
steps to rein in credit, including requiring banks to hold more money in
reserve and taxing some credit card purchases. It has used both measures
before.
Samy Dana, an
economics and finance professor at the Getulio
Vargas Foundation, worries that a credit bubble could lead to bubbles in
other sectors of the economy, such as real estate, as Brazilians spend far
beyond their means.
Rent for prime office space in Rio de
Janeiro is the most expensive in the Americas, recently overtaking New York,
and the fourth-highest in the world, according to Cushman & Wakefield, a
real estate brokerage.
For Xavier, the cab driver, being in
debt in Brazil means working nights instead of playing with his daughter. He
is resigned to working for a long time to pay off his $2,200 debt. And he
knows any sudden misfortune will put him further in the hole.
A couple of thoughts:
Liquidity always chases growth, which
is to say this is all our fault. The Fed creates a
tidal wave of credit to keep US and European banks from having to scale back
their executive bonuses, and much of that money flows to younger, more
vibrant economies, pushing up prices and leading Brazilians to borrow in
order to spend before the local currency loses even more value. There's
nothing mysterious about a liquidity fueled credit boom, nor is the outcome
in doubt. Prices will soar or the government will raise interest rates until
one other the other chokes off growth, millions of over-indebted consumers
and businesses will go bust, and people will stop talking about Brazil as the
world's salvation.
A default rate of 22%; 28% of
disposable income going to debt service; 150 million credit cards in
circulation -- with an average interest rate of 238%. The bust looks
very near indeed.
John Rubino
DollarCollapse.com
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