The credit hangover

The answer was given to us: the action of lowering interest rates by state-owned banks was followed by most private banks, or rather, it was followed by all the largest private banks operating in the national market. A timid move, it's true.

The influence of state-owned players on the Brazilian interest rate regime has been further reinforced after the latest drop in the SELIC rate, which has already triggered a warning sign regarding savings account remuneration.

However, before considering the savings account remuneration system, let's highlight the results for household fundraising, or in simpler terms, the amount of debt that households will face after a decrease in the cost of capital.

The fall in interest rates is extremely necessary, fair, imperative, and effective. What comes after the interest rate cut is what we should now focus on, reflect upon, and definitively consider the impact of.

Brazilian families are eager to consume, eager to access new products and imported goods, driven by the improved quality of consumption brought about by rising wages. Knowing this, the economic policy proposed by the federal government aims precisely to fuel this domestic consumption process to keep the economy stimulated.

Based on a stagnant external scenario, paralyzed by crises and lacking short-term solutions, the way to maintain economic activity is to focus on household consumption. The problem lies precisely in the debt effect this will cause. It's the downside of credit expansion.

The first wave of household debt was generated by the easier purchase of new cars, with flexible payment terms and a wider range of options. Chinese and imported cars, as well as improvements to domestically produced vehicles, were variables that boosted sales, but nothing was more important than the level of financing offered by banking institutions.

The first problem with this debt begins to be felt, with few exceptions, after about 12 to 24 installments, when a tightening of the client's cash flow begins to be noticed (this problem occurs precisely after the period of paying vehicle tax, insurance, and the recognition that the expense with the vehicle includes not only financing installments, but also maintenance and other services).

Therefore, the budget becomes tight, and the client realizes that, even having paid an average number of installments, the outstanding balance does not decrease at the expected rate, mainly because many loans were taken out without a down payment, meaning the financing of the asset was based on the total value.

Furthermore, consumption needs expanded throughout the period when there was already a tight cash flow, further suffocating income. The second wave, admittedly more restricted, came and still is the real estate boom, with financing above the real values ​​of the properties and high installments, which, even subsidized by income, were negatively impacted by real estate overvaluation.

Apartments and houses previously sold at one price have experienced an average price increase of 10 to 20%. It's important to consider that the Brazilian economy is not yet suffering from a default crisis and that the two movements mentioned earlier represent milestones in the evolution of our financial system and economic maturity. If the population continues to take on debt through less expensive credit (even with the lower interest rates, we still have an average rate above the world market), it will trigger a third wave.

The point to consider is that credit at its current level should be used to negotiate and replace more expensive debt with debt at a lower interest rate. However, if Brazilians do not expand their consumption, the recovery of the Brazilian economy will not materialize. For those who do not have debt, there is no restriction on taking advantage of the reduced interest rates.

The central point is that the government, even while expanding credit to boost consumption, will monitor household debt to prevent excesses, as evidenced by the previous move by the Central Bank to monitor smaller loans. In other words, the government first established the basis for monitoring before releasing credit.

We must also remember that lower interest rates can indeed help business owners run their companies, especially those with insufficient cash flow, tight finances, and already paying exorbitant interest rates. Negotiating debts and taking out loans at less penalizing rates is a good alternative.

Finally, the reduction in interest rates had a multiplied effect on other financial agents and may help the economy resume its growth. Business owners and consumers should pay attention to the rules and compare rates. Consumption should be conscious so that it does not become a problem in the future.

Antônio Teodoro is an economist and professor.