Experts warn of potential brazilian sub-prime crisis

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’.

Source: Merco Press