Tag Archives: debt

The Price of Consumer Debt

9 Feb

Credit is a difficult issue in Latin America. Credit card APR interest regularly runs at 30-50 percent, upwards of five times what it is in North America. Bank loans are not a lot cheaper. Yet more than ever  Brazilian consumers are borrowing and financial institutions are encouraging them to do so.

When I recently opened up an account at Itaú, Brazil’s biggest private sector bank, I was surprised to see that the checking account automatically included a 500R line of credit on the account (equal to about one month’s minimum wage), with an interest rate of 138 percent per annum. So if I have no money in my account and start dipping into this line of credit, I will be paying close to 12 percent interest per month on my debt. These sorts of interest rates can only be qualified as usurious.

The combination of Brazil’s lofty real interest rates (among the highest in the world), the priciness of imports (due to tariffs), economic optimism among Brazilians, rising inflation, the global surge in the price of food stuffs, and the increasing availability of credit, it is no wonder that the Folha de São Paulo recently reported that debtor defaults were up by 25 percent in January, 2011– the highest level since 2002. What are the consequences? The poor and uneducated get hit hardest, and higher defaults inevitably raise the cost of capital (and debts) even further. Is it time for greater regulatory control?

#5 Credit: Brazilians Debtor despondency rises by 3.9% Over A Year Ago

14 Aug

Use your coconut to think about that one.

CREDIT CRAZY——The current upswing in consumer debt despondency has much to do with government policy.

First, a buoyant economy has permitted the Brazilian Central Bank to lavish  favorable terms for commercial lenders, who issue credit with some of the highest interest rates in the world. Because profits and legislation permit greater risk, Brazilian banks have been putting credit cards and loans in the hands of the emerging lower-middle class. Unexperienced with credit, many are clueless about how to manage their affairs.

What makes the situation even trickier is the way Brazilians pay for things. One can buy clothing, gifts, even prescriptions, and pay in parcels over several months by credit card or check (e.g. 12 X $47R). Similar to financing, this method ensures that consumers account balances don’t suffer big one-time dents, but at the same time it creates the illusion that more money is available for  purchases, which generate greater obligations and greater potential for despondency.

MUITO CARO—-The second issue is the cost of living. Last entry I spoke about the cost of consumer durables. But as any tourist will agree, virtually everything is expensive. How do we explain all-round expensiveness? Perhaps it’s the explanation I provided about copy-cat pricing: imports are expensive so domestic producers follow suit. Perhaps it’s just a collective greed that has set in during high economic times; the economy is doing well and everyone is demanding more money for everything… I am not exactly sure how to explain the disordinate cost of living here in Brazil. The latter is my “collusion” explanation. As we will see in future entries, Brazil has a long and inglorious tradition of collusive politics. But that story is for another time.