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BUSINESS GUARDIAN www.guardian.co.tt OCTOBER 2013 • WEEK FOUR
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In 2008 Luiz Inacio Lula da Silva, then
Brazil s president, boasted that, by the time
the "tsunami" unleashed by Lehman Brothers
collapse hit his country s shores, it would
dwindle to a "little ripple." The stimulus pro-
gramme he put in place helped to carry Brazil
through the credit crunch relatively unscathed.
Five years later, however, public money still
is pumping into its economy, with ever-more-
negative consequences. Public debt is rising.
State banks are taking more of the credit mar-
ket. The government is warping accounting
standards in its attempts to disguise all this.
Concerned that consumers are overextended,
private banks have held back on lending in
recent years. Since 2008, however, the cor-
porate loan book of BNDES, the national devel-
opment bank, has grown by 24 per cent annu-
ally, far above nominal-GDP growth of 11 per
Caixa Economica Federal, a state retail bank,
has expanded lending by 42 per cent annually
for the past three years. By June state banks
had 50.3 per cent of all outstanding credit, up
from 33 percent in 2008, the first time they
had passed the halfway mark since a wave of
bank privatisations in 1999.
BNDES and Caixa are funded by a tax on
workers as well as by recycled loan repayments
and, in Caixa s case, deposits. Hectic loan
growth means that both are stretched thin.
Caixa s loan-to-deposit ratio has soared from
49 per cent to 113 per cent in the past five
years. The treasury now accounts for more
than half of BNDES s funding, from almost
nothing five years ago. Treasury funding of
state banks grew from US$6.5 billion in 2007
to US$188 billion last year, 9.2 per cent of
As lending has increased, the quality of state
banks capital has worsened. A growing part
consists of shares in state-controlled firms,
which are less liquid and more volatile than
cash, but can be handed over by the treasury
without it having to borrow. By the end of
2012, BNDES s Tier 1 capital, the most solid
sort, had fallen to 8.4 per cent of assets and
Caixa s to 6.6 per cent, far below the 12.1-per
cent average for Brazilian banks.
BNDES has high underwriting standards
and good collateral, but ten biggest borrowers
account for a worrying four times its Tier 1
Caixa s retail borrowers often are first-timers
of unknown creditworthiness. The early
months after taking a loan should be the least
fraught, meaning that the bank s big expansion
should have cut the share of loans in arrears.
That it did not suggests trouble for the future.
More risks come from a government-sub-
sidised scheme giving poor Brazilians cheap
loans to buy computers, furniture and white
goods. Leaked documents show that Caixa s
analysts expect default rates to be between 30
percent and 50 percent.
In March Moody s, a ratings agency, down-
graded both BNDES and Caixa to match Brazil s
sovereign debt. Their stand-alone ratings,
which assume implicit government support,
are now below investment grade. The reason,
Moody s analyst Alexandre Albuquerque says,
is that both have become entwined with gov-
ernment economic policy.
"They are no longer a better risk than public
debt," he says.
Much of the state banks lending is at rates
lower than the government s own funding
costs. The difference is borne by the treasury.
Mansueto Almeida of IPEA, a government-
funded think tank, estimates that it will reach
24 billion reais this year -- about the same as
the Bolsa Familia anti-poverty program, which
boosts the incomes of nearly 14 million very
BNDES was set up to increase investment.
Even as its loan book has ballooned, however,
Brazil s overall investment rate has stagnated.
Burdensome paperwork and a fondness for
national champions mean that much of its
lending goes to firms big enough to seek private
funding, rather than to small ones that are
starved of credit. Its subsidised rates crowd
out private loans.
"BNDES loans have replaced some invest-
ment from companies own resources," says
Gabriel Leal de Barros of the Fundacao Getulio
Vargas, a research institute. "The subsidies
mean that it can be cheaper to borrow than
The desire to mask the consequences of
increased state lending has tempted the gov-
ernment to fudge both its own and the banks
accounts. Last December it put off paying for
the subsidies on a particularly cheap credit
line for BNDES until 2015. BNDES has been
allowed not to book losses on shares it holds
until it sells them, and to use transfers from
the treasury to lend more before bolstering its
Tier 1 capital.
Another ruse comes close to a shell game:
Treasury funding for a state bank does not
count as an expenditure in the national
accounts, but the higher dividends that such
funding lets the bank pay do count as gov-
Even the government seems at last to realise
that the flood of public money gushing through
Brazil s state banks must slow. In April Luciano
Coutinho, the president of BNDES, said that
the bank had been so successful in creating
national champions that it could now ease
off. On October 14 Finance Minister Guido
Mantega said that the treasury would cut
transfers to BNDES during the next few years.
Putting such good intentions into practice
collides with other aims of the government,
however. Though Caixa s consumer loans make
for bad risks, they are vote-winners for Pres-
ident Dilma Rousseff, who is seeking re-elec-
tion next year.
Her plans to upgrade Brazil s skimpy trans-
portation links by auctioning concessions to
build and run infrastructure will stretch BNDES
as never before. It is supposed to be funding
around 70 per cent of the costs, 170 billion
reais during the next five years.
@2013 Economist Newspaper Ltd. (Dis-
tributed by the New York Times Syndi-
Brazil's development banks look shaky
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