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RR RUEHRG
DE RUEHSO #0373/01 1811447
ZNR UUUUU ZZH
R 301447Z JUN 09
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 9303
INFO RUEHBR/AMEMBASSY BRASILIA 0457
RUEHRG/AMCONSUL RECIFE 4389
RUEHRI/AMCONSUL RIO DE JANEIRO 9181
RUEHBU/AMEMBASSY BUENOS AIRES 3540
RUEHAC/AMEMBASSY ASUNCION 3787
RUEHMN/AMEMBASSY MONTEVIDEO 2931
RUEHSG/AMEMBASSY SANTIAGO 2787
RUEHLP/AMEMBASSY LA PAZ 4125
RUCPDOC/USDOC WASHDC 3279
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC

UNCLAS SECTION 01 OF 03 SAO PAULO 000373 
 
SIPDIS 
SENSITIVE 
 
STATE PASS USTR FOR KDUCKWORTH 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE 
STATE PASS NSC FOR ROSSELLO 
DEPT OF TREASURY FOR LINDQUIST 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD BR
SUBJECT:  WHY IS BRAZIL'S COST OF CREDIT SO HIGH? 
 
REF: Sao Paulo 280 
 
SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY 
 
¶1.  (SBU) Summary:  Consumers and businesses pay more for loans in 
Brazil than they do in almost any other country, with average 
interest rates on credit cards of 200 percent and some of the 
highest banking spreads in the world.  While the GOB blames banks 
(and vice-versa) for the high real interest rates, both parties 
share responsibility.  Analysts believe that to reduce high interest 
rates, banks should first centralize consumer credit history data, 
and thus reward clients with a good credit history with lower rates. 
 End Summary. 
 
--------------- 
200 Percent APR 
--------------- 
 
¶2.  (SBU) At 35 percent, Brazil has the highest commercial banking 
spread in the world (i.e., the difference between the interest rate 
banks pay depositors and what the banks charge businesses and 
consumers), according to a March report from the Institute for 
Industrial Development, a lobby group.  Despite the BCB's relatively 
low overnight lending rate (known as the  SELIC rate) of 9.25 
percent, consumers pay an average interest rate of over 200 percent 
on credit cards, according to Fernando Valim, President of 
Experian/Serasa, the only significant credit rating agency in 
Brazil.  Secured loans fair somewhat better-- consumers paid an 
average of 132 percent per year and businesses paid 63 percent, 
according to a May report from the National Association of Finance, 
Business, and Accounting Executives (ANEFAC).  Depositors by law 
currently receive 0.55 percent per month on their savings account 
deposits, minus a substantial bank fee, which varies by bank. 
 
¶3.  (SBU) Some economic sectors, such as farmers and small 
businesses, receive loans sharply discounted by government mandate. 
Private bank sources say, however, that banks pass on the cost of 
these government-mandated, lower interest rate loans to their other 
clients.  Consumers can also receive discounted loans for real 
estate purchases through the GoB-owned Caixa Economica. 
 
¶4.  (SBU) In a competitive market, if one bank offered a loan for 
less than another, other banks would be forced to lower their 
interest rates.  Brazilian credit, however, does operate in a 
sufficiently competitive market to allow for this.  Because positive 
credit history is not centralized, clients must build a relationship 
with just one bank, usually the one that focuses most on their 
individual needs.  For example, government-owned Banco do Brasil has 
previously concentrated on agricultural loans, so construction 
companies have historically looked to other banks for their own 
financing.  If a company or individual were to try to take advantage 
of a lower interest rate offered by another bank, they would have to 
answer questions about why they have left their old bank, filling 
out myriad forms, and ultimately receive a smaller loan than they 
would have gotten from their original bank.  Since banks effectively 
lock in their customers, price differences for loans from one bank 
to another do not create a strong downward pressure on the spread. 
 
 
¶5.  (SBU) Another obstacle to lowering the spread, according to 
Valim, is the inability of creditors to enforce contracts when 
consumers default on their debts.  Consumer protection laws make 
repossession so cumbersome that most banks prefer to write off their 
losses in the event of default.  A 2007 Brazil Central Bank (BCB) 
study detailing the costs of the spread supports Valim's assertion. 
The high default rate is responsible for 37.4 percent of cost of the 
spread.  The bank's margin ranks second at 26.9 percent of the 
spread.  And government taxes are third with 18.3 percent. 
 
¶6.  (SBU) Brazil's high interest rates increase the risk of default, 
according to Yoshiaki Nakano, Director of the Economics Department 
at the Getulio Vargas Foundation.  Companies choose to invest in a 
project only if it will earn more than government-backed securities 
plus a risk premium.  Since interest rates in Brazil are so high 
(currently at 9.25 percent, actually an historic low), an investment 
 
SAO PAULO 00000373  002 OF 003 
 
 
project will need to earn a very high rate of return to make it 
worthwhile.  It will also carry with it a correspondingly high risk 
of failure.  Banks thus charge an even higher rate to compensate for 
increased risk.  The inverse is also true--with interest rates in 
Brazil falling, Nakano believes the spread will fall at an even 
faster rate. 
 
---------------------- 
A Solution to Default... 
---------------------- 
 
¶7.  (SBU) The high default rate is primarily a result of weak 
contract law, according to former BCB Deputy Governor Luiz Fernando 
Figueiredo.  To help lower the interest rates for good consumers, 
Figueiredo introduced conditional sales contracts to Brazil 
("alienacao fiduciaria") during his tenure at the BCB.  Under a 
conditional sale, a consumer buying on credit can take possession of 
a good, but the actual title remains with the bank until the item is 
fully paid (similar to car loans in the United States).  Buyers who 
default are required to return the purchased item to the bank or 
face prison.  The fact that banks can repossess leads to lower risks 
for banks and thus lower interest rates for consumers.  It has 
helped significantly to lower the interest rate for loans in the 
real estate sector, for example. 
 
------------------------------------ 
...Undermined by Judicial Intervention 
------------------------------------ 
 
¶8.  (SBU) The courts have invalidated conditional sales contracts in 
some sectors by blocking banks from repossessing goods.  In the 
state of Mato Grosso, for example, farmers who could not make 
payments for their agricultural equipment took their case to court 
and won the right to keep their goods, despite being in default. 
Consequently, banks no longer offer conditional sales contracts for 
agricultural equipment.  The future of this innovative system is in 
jeopardy, as well, according to Figuerido.  Since Brazilian courts 
follow Roman law-based judicial norms, judicial precedent does not 
bind judges' decisions.  They reinterpret the law in every case, and 
a capricious judge could decide to end conditional sales contracts 
in any sector he or she chose. 
 
---------------------- 
A Credit Score of Zero 
---------------------- 
 
¶9.  (SBU) Boosting positive data flow to the credit markets, i.e., 
undertaking a scoring system similar to the United States, would 
also help lower the spread, according to Valim.  The banks 
themselves constitute the principal barrier to such a system.  Flush 
with cash from their 26.9 percent profit margin, banks would prefer 
to lock in customers rather than lose them to other banks, so they 
closely guard data on their costumers' lending history.  If they 
shared this information, well-informed consumers could arbitrage the 
difference in rates, force down the spread, and cut into the banks' 
high profit margins. 
 
¶10.  (SBU) The lower house of the Brazilian Congress approved 
legislation on May 19 that would create a centralized system to 
track positive credit, i.e., a positive credit bureau.  The Senate 
still needs to approve the law.  Director-General of the Brazilian 
Banking Association (Febraban) Wilson Levorato called the lower 
house's passage "an historic moment" in a press interview.  He said 
that 95 percent of consumers pay for the five percent who default 
and that this legislation is the first step to addressing this 
disparity.  Consumers who opt-into this new voluntary system would 
have their credit payments tracked.  Those who prove good credit 
history eventually would pay lower interest rates on loans, though 
it would take some years to build their credit score.  Valim 
actually opposes the legislation, telling EconOff that it has been 
so heavily amended that it would actually impede credit expansion. 
(Note:  If the Senate passes this legislation and President Lula 
eventually signs it, there would be no need for Experian/ Serasa to 
continue operations.  End note.) 
 
 
SAO PAULO 00000373  003 OF 003 
 
 
¶11.  (SBU) Comment:  While Brazil's untapped credit market has held 
back growth, it has also has been the country's greatest defense 
against the ongoing financial crisis.  Banks have not had to dabble 
in higher risk activities, such as mortgage-backed securities and 
other toxic assets, because straightforward loan portfolios are so 
profitable.  This profit margin has infuriated President Lula and 
led him to publicly attack private banks.  His self-described 
"obsession" with lowering the spread may have led Lula to try to 
force the state-owned Banco do Brasil to lower banks' profit margins 
on loans (reftel), but a more effective, though politically more 
challenging, approach to  pushing down the cost of credit would be 
to lower taxes on banks, which could then pass those savings along 
to consumers and businesses.  End Comment. 
 
¶12.  (U) This cable was coordinated with and cleared by the Treasury 
Financial Attache and Embassy Brasilia. 
 
WHITE