By Mary Stokes.

Defaults on auto loans reached a record-high in April, making the government’s recently announced strategy to encourage more car financing look ill-conceived. Jose Paulo Kupfer, a columnist with Estado, believes the policy will fail to stimulate the economy and could lead to more defaults. We agree.

Nevertheless, Kupfer is not overly worried. He argues that even though the default rate has risen fast, it remains low. He also points out that Brazilian consumers are not highly leveraged. Consumer debt amounts to about 20% of GDP, much lower than levels in other countries where it typically exceeds 80%. While Kupfer believes that the rate of bad auto loans has reached a peak, we take a more sceptical view. With economic activity slowing and household indebtedness increasing (albeit from a low base), a further rise in the default rate would not surprise us.

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