Government interference in Brazil’s loan markets could lead to a new credit bubble, analysts warn. They fear cheap lending through state-owned Banco do Brasil could trigger the country’s own sub-prime crisis as other banks are forced to follow suit in order to remain competitive.
"The government has specific objectives in mind," says Nick Chamie, global head of emerging markets research at RBC Capital Markets. "They have made it quite clear they want to drive consumer loan rates lower, and that troubles me. Market mechanisms are the best way to price risk and so setting rates below where the market can offer them is just sowing the seeds for a bubble – a credit bubble that will eventually lead to a default bubble."
| "This government has proven that they generally do the right thing by the markets in the end" |
He adds: "If Banco do Brasil is charging lower rates then competitive forces will make the other banks do the same – shrink their interest rate spreads and extend loans to the riskier buckets of borrowers. Investors will not just penalize Banco do Brasil.