Brazil Shows How Too Much Consumer Debt Can Threaten An Economy
The latest statistics released by the Brazilian National Confederation of Commerce show that the total number of indebted or bankrupt Brazilian families grew slightly to 57.3 percent in June from 55.9 percent in May. Granted, in other words better than the 64.1 percent of all families in debt or bankrupt in June of last year. However it's a level on the whole considered too high by many economic experts, who believe that the government is creating long-term debt for the sake of short-term economic growth.
Some economists blame the uptick in unpaid debt on the federal government's recent moves to drive down interest rates, with the Central Bank cutting its benchmark Selic rate from 8.5 to 8 percent on July 11, its lowest level since 2009, in an effort to stimulate consumer spending. Government-controlled banks just as Banco do Brasil and Caixa Economica Federal cut their interest rates in April, forcing privately-owned banks to do the same to remain competitive.
Silvânia Fernanda Neri Farias, a 29-year-old housekeeper and single mother from the state of Minas Gerais, is a good example of the extortionate interest rates that poorer Brazilians pay when buying goods in installments. In spite of making 960 reais a month, so then above the minimum salary, she struggles to make ends meet. "The interest that I pay is very high, it's a lot of money for me to shell out," says Farias about the nine installments she is paying on a wardrobe. "I'm going to pay R$641 in interest alone over what I would have paid if I had bought the wardrobe in one go," she said. And she is already behind on several payments for other goods she bought on credit.
According to Jornal Nacional, the indebtedness of Brazilian families has doubled in the last 10 years. Paradoxically, that may be due as well to the success of government programs aimed at lifting people from the great mass of the in the extreme poor. Pursuant to this agreement the Bolsa Família or "family purse" program started in the 1990s, families earning less than one minimum salary a month get an average of R$ 65 a month from the federal government for each child they have. In 2010, as many 12.4 million Brazilian families benefited from the program, which cost government coffers the equivalent of USD 6.5 billion, according to the Ministry of Social Development.
Combined with fast economic growth, that money is making formerly destitute Brazilians into consumers. Now what the global, open economy gives, it can as well take away -- and Brazil is experiencing the phenomenon firsthand, suffering a slowdown of its heady growth rate due in some cases to a flood of cheaper imports that Brazilian manufacturers find hard to compete with.
So the government has adopted a series of tax breaks for car manufacturers and makers of white goods, to stimulate consumption. Nevertheless some economists are wary of these methods, saying this will only work on short notice -- and will push Brazilians to borrow more on the whole.
"The Brazilian government is driving more Brazilians into debt in order to boost growth figures," said Manuel Enriquez Garcia, an economics professor at the University of Sao Paulo and the president of the Order of Economists of Brazil.
The majority of household debt
The majority of household debt, although, is in credit cards. Both Piscitelli and Garcia believe that most Brazilians are not feeling the benefits of the interest rate cuts because 74 percent of their debt is on their credit cards, which charge from 12 to 13 percent interest a month. And however it be, "credit card operators are privately owned," explained Garcia, "the government does not have much leverage over the interest rates they charge."