Default on banks grows, but is smaller than under Dilma – 04/26/2023 – Vinicius Torres Freire

Indebted households and defaults have become a relevant political issue. The Lula government is trying to implement a debt reduction plan, Desenrola. It did not go into operation because the system operation technology needed to be developed.

The government also proposed the idea of ​​setting interest rates, as in the case of payroll and revolving credit cards. It does not work.

In banks, defaults have been on the rise since mid-2021. How high? Not as much as under Dilma 1, Dilma 2, in the Great Recession (2015-2016) and in the years of slow exit from the bottom of that catastrophe, until 2018.

The problem seems more complex than the headlines about default rates of nearly 50% on a certain line of credit suggest. Simplifying the problem is not a good way to fix it.

In the general average, defaults up to January of this year were lower than those recorded during the years of Dilma Rousseff’s government 1 (data referring to so-called “free” credit). At the Central Bank, which compiles these statistics, there is no data prior to 2011.

With regard to legal entities, delinquency is still lower than that recorded from 2011 to 2019. As for individuals, it is also lower than in most of Dilma 1 and in the Great Recession (December 2015 to September 2016 ).

The extreme problem is in the credit card, the revolving and the installments. On these deadly lending lines, defaults are record and huge since mid-2022.

In other types of loans, things are not as bad as in the first government of Dilma Rousseff, repeat, when there was growth in GDP, wages and social benefits (although dissatisfaction boiled low, see 2013).

Total credit (balance) via revolving credit card represents only 4.5% of total free credit to individuals and 1.5% of total bank loans. The individuals and families who fell into this satanic mill are disgraced indeed. There is no way out of debts with interest rates of more than 400% per annum. It would be convenient to try to find a punctual solution to this despair and, more importantly, to carry out some reform that prevents this disaster.

Even so, it is a very small portion of the total credit. There are problems elsewhere.

To begin with, people go into debt for services such as water, electricity, internet. Also, even if they don’t have overdue bills, it could well be that servicing that debt is strangling budgets.

The Central Bank also has statistics on household indebtedness. The commitment of household income to debt service (payment) averaged 23% from 2017 to 2019 (after the Great Recession, before the epidemic). As of July 2022, it has been around 27%.

This BC number has interest, but obvious limitations. They are averages, total debt service as a proportion of total income. That average, of course, erases huge differences and dire situations. In any case, it shows that debt weighs more and more on budgets.

Debts can be a good thing, also obvious, as when it is possible to finance and pay for a house, for example. The size of credit relative to the size of the economy (of GDP) in Brazil is relatively small.

It is possible to think of programs to occasionally mitigate unbearable situations. But there is nowhere near enough public money to subsidize everyone in difficulty, nor is the difficulty, in general, as great as in the years 2010-19.

For the rest, this is covering the sun with a sieve. Without economic stability (tidy public accounts, inflation and lower interest rates) and growth, any general promise of resolving the situation is demagoguery and unsustainable.

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