About interest and itches (E)

Paulo Emílio _PE247 - It was a long fall, where the impact took longer than expected. But it happened. The Federal Government forced its hand and, using the weight of the state-owned banks (Banco do Brasil and Caixa Econômica), reduced interest rates for the end consumer. Under pressure, the large private institutions have no alternative but to follow the trend and, in this way, offer cheaper credit. The measure aims to reduce the cost of the Brazilian banking spread, one of the highest in the world, and keep the economy heated.

In this respect, the Government is more than right. With the economy showing signs of slowing down since 2011, something needed to be done to keep the engine running. While reducing public spending, particularly operating costs, for example, the level of investment is maintained so that the economy continues to grow. Even so, there is less money circulating, fewer people buying... So the solution found was to reduce the cost of the bank spread, transferring in a way part of the responsibility for the money supply to the private sector. And there is still room for improvement.

The bank spread includes administrative costs, the risk of default, low competition – the Brazilian financial system is not very competitive with four or five institutions in control, creating a kind of oligopoly – tax costs, and an extremely high profit margin. The average profit is close to 30%. According to Pierre Lucena, a professor of Finance at the Federal University of Pernambuco, this rate can reach 80% for overdraft facilities.

The changes made to the basic interest rate, the Selic, alone were not enough to revive the economy, since the decrease did not reach the final consumer. Now, with the general reduction in interest rates, the supply of credit increases and the risk is diluted due to the new users who gain access to the system. Another result is the diversification of the portfolios offered by banks.

The reduction in the spread by state-owned banks finally prompted the private sector to move in this direction, resulting in exactly what the government expected: increasing the supply of credit to the market without having to, at least for the moment, adjust the stock of public debt (remembering that the higher the interest rates, the larger the outstanding debt).

Bradesco was the first of the major private institutions to follow this path, reducing interest rates by approximately 50% for personal and corporate loans, in addition to injecting R$ 21 billion in new resources into existing financing lines. Other institutions are expected to follow suit in the coming days.

But what about the risk of inflation? It's real, but it's not as monstrous as many doomsayers are proclaiming. In the last 12 months, inflation has fallen from just over 7% to just over 5%. Therefore, there is still a good margin for maneuver. Economist and Financial Director of Ceplan Economic Consulting and Planning, Jorge Jatobá, observes that the increased availability of credit resulting from this movement will lead to increased consumption, potentially impacting household debt levels and generating, without fiscal control and a critical look at the economy, the much-feared demand-pull inflation.

But in a way, even this is a calculated risk. According to Pierre Lucena, the level of indebtedness of Brazilian families, when compared to the Gross Domestic Product (GDP), is much lower than that of so-called developed countries. This index hovers around 40% in Brazil, which allows for some adjustments if necessary.

And if the inflation dragon starts to growl, the Government could use force to keep it quiet with measures such as raising the Financial Operations Tax (IOF) or even raising the Selic rate, although this would also increase the stock of public debt. In any case, the Government seems willing to fulfill its role as conductor of the economy, and the private sector, which used to disdain official initiatives, is starting to get worried.