How Lula, Bolsonaro and the market try to reduce indebtedness in Brazil

The two presidential candidates, Luiz Inácio Lula da Silva (PT) and Jair Bolsonaro (PL), have been saying in their campaigns that they will bring relief to indebted families, solving a problem that affects economic growth.

But economists and bank executives say the solutions presented so far are “band-aids” that will not structurally solve the problem of over-indebtedness and its impact on the economy — and financial institutions themselves are trying to find new ways to renegotiate debt in delay and take the weight off the credit markets.

With about 70 million Brazilians with negative names in credit protection services, according to Serasa, totaling R$ 290 billion in debt, serving this population is an important electoral strategy in a disputed second round.

Lula, who is ahead in the polls, proposes a debt renegotiation with government support. According to advisors, PT should first focus on the R$95 billion in unpaid service bills accumulated by families earning up to R$3,600 per month. Then the government will try to help with incentives to restructure bank debt.

Trying to win points with this population, President Jair Bolsonaro announced a program by Caixa Econômica Federal offering a large discount on bank debt. But the scope of the measure – the relaunch of a program that the bank had been carrying out in recent years – is modest. There are about 4 million customers whose debts have already left the bank’s balance sheet and reach R$ 1 billion.

“It doesn’t change much,” said Eduardo Martins, a partner at credit manager MGC Crediativos, which estimates the total balance of overdue loans in Brazil to reach R$1 trillion, including bank debt, with retailers and telecom accounts and services such as water and sewage.

Martins also believes that Lula’s proposals do not consider the current state of debt. “Any plan must assume that 60% of the debt has already been sold to investors, so incentives given to banks will be innocuous.”

The secondary market for overdue debt has grown dramatically in recent months, especially after changes in credit rating criteria by the Central Bank, which accelerated the sale of portfolios by banks.

Volume also increased, as the slowdown in economic activity during the pandemic and the subsequent rise in inflation and interest rates pushed up delinquency levels and put more households on restrictive credit lists.

The former director of the Credit Guarantee Fund, Fábio Mentone, says that the credit restructuring is important, but it will not have a macroeconomic effect if conditions do not change, such as the level of employment, inflation and interest rates.

“If you solve the problem of overdue debts but continue with very high interest rates, soon you will have the same problem again,” he said.

Active markets

The large volumes of non-performing debt negotiated in the private sector increased renegotiation activity with debtors. Several companies offer discounts of up to 90% of the debt’s face value. The original creditors, who get rid of the portfolio, prefer not to offer high discounts directly for fear of encouraging good creditors to stop paying.

Restructuring firm Pantalica Partners estimates that about BRL 115 billion in overdue loans were sold on the secondary market this year, about 5 times more than in 2019.

Most of the volume is from the credit portfolios of the largest banks, retailers and service concessionaires. About $37 billion is in corporate debt sales from large companies.

Among the biggest portfolio buyers this year are asset managers and credit management companies such as Jive, SPC, Cerberus, BRD, Quimera and Quadra. Intrum, one of Europe’s largest credit managers, opened a subsidiary in Brazil in 2020. Higher interest rates are expected to push up credit defaults and increase the stressed asset pool.

The largest banks now also own credit recovery companies. Recovery is controlled by Itaú, and Return by Santander. RCB Investimentos is controlled by Bradesco.

Since the pandemic, debtors have preferred to settle their debts through websites, without having contact with any debt collector. At Crediativos, for example, this modality now represents 70% of all renegotiations. A minority use call centers.

Most of the debts that take debtors to Serasa have low values ​​– on average R$1,215 and are usually not refinanced. Debtors usually pay them off in one go at a deep discount.

A large volume of credits should come to market in the coming months at an auction by Emgea, a non-financial company controlled by Caixa Econômica Federal that manages around R$60 billion in credits for individuals and companies, usually with some collateral. Most of the credits that will go up for auction are old and some are over 20 years old. These assets are not related to the Caixa program announced by Bolsonaro during the campaign.

Samuel Oliveira, founder of the Northstone boutique, says that large international investors in stressed assets are looking at the Emgea auction and increasing portfolio acquisitions in Brazil.

Unlike previous cycles of high interest rates, Brazilian families today have a higher level of indebtedness – in August, 80% of families had debts. Volume has also grown with the incentive of low interest rates in recent years. Real estate credit, which represented just 4% of GDP in 2010, reached 10% last year.