Brazil: B in BRIC stands for bust

Brazil is confronted by slowdowns in its major export markets together with a home grown credit mess. It is doubtful that it can save itself, much less the rest of the world

In February 2011, I wrote a piece about what I thought was a credit bubble in Brazil. I thought that the problem was serious and that it could potentially lead to a collapse. Most other commentators felt that there wasn’t really a problem. For example, I quoted a former central banker, Arminio Fraga, who said that there wasn’t an issue. He said “We may have traces of sub-prime in the system... I don’t think it has gone that far.” He was wrong.


Since the crash, emerging markets have helped to spur global growth. The faith in their ability to continue growing seems eternal. On 12th July, I saw a new report from Ernst & Young that suggests emerging markets will save the slowing world economy and provide a new engine of growth. It is all rather sad, because they won’t. An excellent example is Brazil.


Brazil was fortunate in that it really did not see many of the problems that hurt most of the world during the recession. When most countries were contracting in 2008 to 2009, it grew 5%. Its growth continued to climb to 7.5%. But the party is ending. This year it is expected to grow only 2%. In fact, it will be lucky to achieve even that. To see the reason why, we must look at why Brazil was able to do so well.


Brazil’s growth has been based on its vast wealth in commodities. One of Brazil’s principal exports is iron ore, which almost tripled between 2007 and 2011. The projected demand was so great that Vale, the Brazilian mining giant, began to build a fleet of massive ships to carry the ore. These ships, appropriately called Valemax, are about 400,000 tonnes among the largest ships ever built. Brazil is also particularly rich in agricultural commodities of all sorts. Thanks to demand and global warming, the prices for these commodities have been between 50% and 100% higher than they were in the previous decade.


Although weather did play a part, the prices for Brazil’s commodities would not have been as spectacular had it not been for the demand from China. China’s often double-digit growth has pulled in raw materials of every variety, sending prices to new heights. Normally the anaemic growth of the developed world would have limited the demand, but China and other emerging markets set the pace. This year China replaced the United States as Brazil’s main trading partner, a change now common throughout the emerging markets.


Like all the emerging markets, the economy in Brazil is dominated by the state. US style capitalism is considered too radical and unfair. The former president, Luiz Inácio Lula, was once a labour leader and relied heavily on state-led consumption. Under his administration the state banks’ loan growth grew by 50% in 2009 alone, five times more than the private banks. He also encouraged consumers and the new middle class to go on a borrowing binge, which they did. The result was that consumer credit doubled in five years. This led to a real estate bubble and a debt service burden for consumers of 24%, much higher than the pre crash peak of 14% in the US.


 But despite the predictions of economists like Ernst & Young and Jim O’Neill of Goldman Sachs, no economy grows forever. The three main pillars of Brazil’s growth, commodities, China and credit are beginning to collapse.


I have been writing for some time about the problems in China. Most economists have predicted a soft landing, which I objected to last November. Despite the optimism, the ‘landing’ has been getting harder every day. The fall in China’s economic growth has accelerating since it reached its peak in 2010. In the most recent quarter it fell from 8.1% to 7.6%. Some experts believe it could be even worse.


The slowdown in China has affected all sorts of commodity prices. Imports of commodities into China grew only 6.3% in June, half the forecast rate. The only reason it may have grown at all was to provide collateral for an enormous credit bubble. The slowdown in commodities will impact heavily on many countries rich in commodities like Chile, Australia and perhaps most of all, Brazil.


The end of the commodity boom will only worsen the collapse of the credit bubble. Loans overdue by 90 days hit 6%—the highest since records were started in 2000 and higher than the previous peak in 2009. The default rate is particularly troubling in a time of low unemployment. It also limits the scope for stimulus as banks refuse to lend.


Recessions can begin in a number of ways. Brazil is now confronted by slowdowns in its major export markets together with a home grown credit mess. It is doubtful that it can save itself much less the rest of the world.


(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected].)


Bank officer held for siphoning off Rs1.5 crore

A probationary officer from Central Bank of India's Dwarakanagar branch allegedly diverted Rs1.5 crore in his personal account, took sick leave from the bank and started working with a private bank in Jharkhand


Visakhapatnam: Former probationary officer of a local branch of Central Bank of India was arrested in Berhampur in Odisha for the alleged illegal transfer of Rs1.5 crore into his bank account, reports PTI quoting a Commissioner of Police.

Abhayanand Paswan, probationery officer from the Dwarakanagar branch of the bank, was arrested and cash worth Rs1.48 crore was recovered from him, Commissioner of Police J Purnachandra Rao said during a press conference.

Assistant general manager of the branch G Venkata Subba Rao had lodged a complaint against Paswan on 29th June alleging illegal diversion of Rs1.5 crore into his personal account.

City police had appointed a special team to track the accused.

According to Rao, the accused had gone on sick leave from 27th June and began working in a private bank in Jharkhand.

The fraud was detected after an internal audit conducted by the bank.

The bank officials traced the transactions of the accused in Odisha, as he had started withdrawing money from various ATM centers there, following which, a special police team went to Odisha and arrested the accused and recovered the cash from him.



T D Sharma

5 years ago

He ought to have waited for a few more years of experience, as a very large number of bankers do, before embarking on the "self help" project! Every success has a murky past. This young chic was clearly in a hurry in a field which is very common. Like, in the income tax department, the IRS officers and the newly promoted ITS (from the already corrupt rank of inspectors) start earning money as bribes rigt from day one in chair, but then that is what the tax payers and their professional representatives want too. What was the big hurry for Mr. Paswan?

RBI for debt recast of textile units on case-by-case basis

The special window will be provided by all banks to the textile sector to consider debt recast between 1st August and 30 October 2012


New Delhi: Rejecting across the board restructuring of loans for the cash-starved textile sector, the Reserve Bank of India (RBI) has asked banks to consider debt recast for the industry on a case-by-case basis, reports PTI.

Banks have been advised to look at debt recast on a case-by-case basis and special window will be provided for restructuring, official sources said.

The special window will be provided by all the banks to the textile sector between 1st August and 30 October 2012, sources said.

The Finance Ministry has asked banks to consider stressed loan accounts in the textile sector for restructuring, including second restructuring, so that viable loan accounts are revived and the financial health of the units are restored.

The sector has been hit by a sharp volatility in cotton yarn prices and poor domestic and global demand.

As a result textile units were facing difficulty in repaying term loans and financing working capital and demanded debt restructuring for the entire sector.

Textile industry associations were seeking a two-year moratorium on long term loans.

The total outstanding debt of textiles sector is estimated at Rs1.6 lakh crore of which debt of Rs35,000 crore require restructuring.

According to a senior bank official, large borrowers in man-made and natural fibres were relatively safe, and the problem was only in the small and medium segments.

The softening of cotton prices are expected to improve the profitability of the sector and companies would be in a position to service their loans, the official added.

In order to deal with the global meltdown triggered by the Lehman Brothers crash, RBI brought in a special dispensation providing for a second restructuring for the entire textile sector in 2008.




5 years ago


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