By Marcelo Ballve.

Any discussion of consumer debt in Brazil (including car loans) has to be grounded in the chart below. The big picture trend is clear, and not encouraging: bad loans are increasing.

The blue line is an index of consumer non-payments on all sorts of credit, not just debt to banks, which is the category most car loans fall into. In other words, it also includes utility bills, credit cards, store credit, and checks, etc.

The measure is basically an indicator of how stretched Brazilian households are. Serasa Experian, the credit tracking agency that puts together the index, reports that the 4.8% rise in non payments (inadimplência) on consumer loans and credit in April compared to March was the greatest monthly variation since 2002. That’s the spike near the right edge of the chart.

And the fear is that a new government policy to encourage more car financing (which accounts for a large chunk of the loan market) will accelerate the trend toward unsustainable consumer debt.

‘Indebtedness, indebtedness, indebtedness’

Talk is cheap, especially when economic analysts throw around words like “bubble,” “collapse,” “crisis,” and whatnot. These are all words that have been attached to Brazil’s auto loan market. But the market is certainly problematic. It has in the last few years been the focus of a messy set of events: schizophrenic policy shifts, a bank collapse (Panamericano), and generally, a source of indebtedness that has been pushing more and more households toward insolvency.

Despite that, on May 21, the government announced an $18 billion package loosening loan rules (Bloomberg story) with the aim at getting Brazilians to finance more cars, and this when consumer default rates, debt-to-income ratios, and economic growth already don’t look too rosy. What’s the deal?

My ears perked up when Miriam Leitão and Carlos Sardenberg, commentators on CBN radio, both spoke about this on May 22. Sardenberg asked why the government was expecting Brazilian consumers to go back to the car lots, when the rush to finance cars had already dissipated, after a near-frenzy atmosphere in 2010 fueled by financing plans that allowed consumers 60 months of payments with no money down.

“People took on credit very intensely,” Sardenberg said on-air. “Defaults began to occur. So how much are sales going to increase now?”

Leitão, his colleague, was more pointed. She asked: why isn’t the government privileging investment, “instead of indebtedness, indebtedness, and indebtedness.”

2011- Rein in the auto loans

In January 2011, the government had forced banks to rein in what seemed like out-of-control auto lending. Back then, Bloomberg used the word ‘bubble’ to headline an article about the credit restrictions. In an unsettling echo of the rise of the Residential Mortgage Backed Securities (RMBS) market in the United States in the 2000s, auto loans have helped fuel a similar market in Brazil, as banks package loans and sell them to investors. The supposed riskiness of these loans, of course, is supposedly mitigated by the fact that the cars serve as collateral.

From the Bloomberg article:

The emergence in 2001 of Brazil’s asset-backed securities industry has also helped spur the expansion in vehicle loans. So-called FIDC funds, which are backed by future cash flow, grew in the past decade to 312 funds worth 59 billion reais, Claudio Maes, a manager supervising structured funds at Brazil’s securities regulator, said in a Jan. 7 interview.

Panamericano’s FIDC funds were mostly made up of repackaged vehicle loans, Maes said.

That’s 59 billion reais, or $32 billion U.S. dollars. Not a huge market, but significant. The failed bank, Panamericano, was an aggressive participant in the FIDC market.

This is from another early-2011 Bloomberg story:

Policy makers said they were taking action to prevent a credit bubble after vehicle financing surged 49 percent last year, payment terms extended to as much as 80 months and regulators launched an investigation into Banco Panamericano SA, the biggest lender for used cars.

Tighter reserve and capital requirements pushed the average interest rate for auto loans to a five-day moving average of 23.1 percent on Jan. 26 from 19.2 percent on Dec. 6, the central bank said today.

These policies appeared to work. The chart at the beginning of this article shows how the trend toward non-performing consumer loans slowed in the second half of 2011.

Some “collateral” parked on a Sao Paulo street

2012 – Reversing course

So why loosen credit again? What has changed, to make policy-makers suddenly reverse course again, except for the fact that consumer default and late payment rates are even higher than they were in 2011?

As São Paulo-based research firm Empiricus noted in a blog post about Brazilian firms’ early 2012 results: “The auto financing market is not seeing its best days.”


Marcelo Ballve is a reporter who for over ten years specialized in Latin America. During that time, he worked in about a dozen countries, and wrote about politics, arts and culture, and business. He was a Jorge Paulo Lemann Fellow at Columbia University’s School of International and Public Affairs (SIPA) and the Fundação Getulio Vargas School of Management in São Paulo.

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