The recent government actions to reduce the interest rate charged by banks are pure populism (due to elections) and president Dilma may have entered into a trap. That’s at least the opinion of Brazil’s former finance Minister Mailson da Nobrega. “No single government in Brazil has ever entered into this strategy of publicly attacking the banks,” said Mailson.
According to him, the “trap” is within the assumption that lowering interest rates could go wrong “either because of rising inflation or due to lowered profitability of public banks”. In this hypothetical scenario, either inflation or interest rates should go up, but the “election interests are speaking up,” according to Mailson. “We know that the central bank today doesn’t have the autonomy that it had in the past. And [in this hypothetical scenario] we could engage in a situation where the government would start fixing prices,” he said.
Mailson defended the current profitability model of banks. For him, the Brazilian banks have very similar profitability levels of Brazilian companies overall. “You can not compare our banks to the European ones, which now have the ultimate goal of not going bankrupt and survive, not making money,” he said.
For the former minister, the excessive profit occurs in markets without competition. So if the banks earn too much, the government should make use of agencies like Cade and the Central Bank to promote competition and investigate whether there is a cartel or not, and only then take the necessary measures if applicable.
“Based on what assumptions does a finance minister say that banks can reduce their profitability? They are all driven by a populist environment, including the current Minister of Finance,” said Mailson, referring to Guido Mantega.
Mailson listed some factors that justify the high interest rates in the country, such as the low savings rate and the history of economic instability. “Brazil is one of the only countries in the world that taxes financial transactions,” he said.
“Many economists in Brazil say that our interest rates must reach international standards. I agree, only if the conditions in Brazil are the same as the international market.” The former minister asks that the government provide a mean for banks to lend at lower rates.”These things have to be discussed thoroughly, and not be pressured or vocalized on TV,” he argued.
For Mailson, the government’s strategy to lower the interests at its own public financial institutions (Caixa and Banco do Brasil) to pressure private banks to do the same “is a violence.” “If the major shareholder determines that its bank charge rates below fair value to affect the market, then such shareholder is breaking the law, and the minority shareholder could take a legal action within the CVM (Brazil’s SEC),” he said referring to the latest episodes at Banco do Brasil.
With the recent developments and speeches, Mailson believes that the popularity of Dilma will grow. “Her popularity will increase as Argentina’s Cristina Kirchner increased hers after the YPF expropriation. In the end, both are populist actions,” he said.
Our humble note: Mailson da Nobrega is a partner at Tendencias Consultoria, an economics consultancy firm in Brazil which has, among its many clients, most Brazilian private banks. In other words, the high interest rates charged by the major banks is a hurdle to every single business and individual in Brazil, but of course it doesn’t harm his own salary and firm’s success which, if anything, depends on these big bank profits. Do you now understand why Mailson is in such a bad mood? Either this, or his retirement money was all tied in to shares of Banco do Brasil (his ex-employer) which took a deep dive recently.