Brazilian banks' external debt doubles in 15 months.

The external debt of Brazilian banks has doubled in the last 15 months – from US$63,6 billion in December 2009 to US$122 billion in March of this year. This rate is significantly higher than the country's total external debt, which includes companies and the government. The latter increased from US$277,6 billion to US$381,3 billion in the same period, representing a 37% rise. The money raised by banks abroad worries the government because of its impact on credit expansion in Brazil. The logic is simple: the institution borrows dollars abroad, converts them into reais, and invests them in Brazil, either in credit or government bonds. By transforming foreign money into domestic loans, banks stimulate consumption, which displeases the government at a time when measures are being adopted to contain rising inflation by slowing down the economy.

From the perspective of bank debt itself, the concern is less, because financial institutions are obliged to protect themselves from potential exchange rate fluctuations by resorting to a market operation called currency hedging. This reduces the risk of a sharp fluctuation of the real against the dollar causing a crisis.

Luís Miguel Santacreu, an analyst of financial institutions at Austin Rating, notes that, in the last 12 months, total credit in the Brazilian economy expanded by 20,7%, a rate higher than what the banks themselves expected. "At the end of last year, the banks' guidance pointed to an expansion between 13% and 16%," he stated.

According to him, despite the government's wishes, financial institutions have found no reason to slow down lending. "The government's own actions indicate a soft landing for the Brazilian economy. In this scenario, banks continue to lend because there is no prospect of a sharp increase in defaults," he argued.