Living with double-digit interest rates

SAO PAULO — Last week, the Brazilian Central Bank made headlines by lowering the Selic, its short-term interest rate, from 13.75 to 12.75 percent. The wire services dutifully shot the story around the world, and non-economists around the world dutifully ignored it.

It may be the most boring story to come out of Brazil since soy prices dipped in early December.

But boring or not, interest rates deeply impact the lives Brazilians lead. Note that the Brazilian benchmark interest rate is now 51 times higher than the comparable U.S. rate, the Federal Reserve’s 0.25 percent. Even after adjusting for inflation, Brazil’s rates are generally considered to be the highest in the world.

What does that mean for Brazilians (and the rest of us who live here)?

Take credit cards. Interest rates run 150 percent to 170 percent a year, making the use of credit cards to finance anything for longer than one payment cycle a financial death-wish. People live in fear of missing a payment due date, and for good reason: A $1,000 balance runs you well over $100 a month, not counting late fees.

Good luck financing that house, too. Mortgages are outrageous by American standards, with rates clocking in at about 12 percent a year, compared to about 5 percent these days in the United States. What does that mean? For a 30-year, $100,000 mortgage, the monthly payment in the U.S. is $537. In Brazil, it's $1,029.

Not surprisingly, many people delay buying a home until they can pay in cash. Alternatively, many buy smaller homes than they would like, or, among poorer Brazilians, simply build their own.

It also means people are much more likely to have their money tied up in their home than, say, in the stock market. And forget about borrowing against that house. Home equity loans are virtually non-existent, said Roberto Troster, a Brazilian economist and partner at Integral-Trust.

There’s another reason not to tie up your money in the volatile Bovespa, the Brazilian stock market: Interest rates for government bonds, and even checking accounts, are sky-high.

This is the flip side of Brazil's high interest rates: If you have money to save, you can make a healthy return. One-year bonds can get you 11 percent or 12 percent, or, if you prefer, about 7 percent plus the rate of inflation. Because so many investors abandoned the Brazilian stock market when it tanked in the fall, the government sold 373 percent more bonds last November than it did in November 2007. And even the simplest of checking accounts gets you at least an 8 percent interest rate; play your cards right and you’ll get more.

Still, many stores do offer financing, and many consumers take them up on it. The ubiquitous Casas Bahia stores are a prime example: They are responsible for getting electronics and appliances into countless middle- and lower-class homes by offering attractive monthly payments and hiding their interest rates. This week, for example, Casas Bahia is offering a Brastemp washing machine for 89.90 reais a month ($39) over 20 months — sounds good until you do the math with the real list price and discover that the offer involves a 77 percent interest rate. To outsiders: a usurious scheme. To Brazilians: business as usual.

There is a healthy spirit of entrepreneurship in Brazil — if you already have the money to invest. But starting a business from scratch, with bank loans, is scary and getting worse. The Jan. 28 Folha de São Paulo reported that the average bank spread in December was the highest in five years: Banks paid an average 12.6 percent rate to borrow money, and lent it out for 43.2 percent.

But the other option — opening a shop or funding a slow-to-launch music career by maxing out your credit cards — is even more far-fetched here.

Ilan Goldfajn, a professor of economics at the Pontificia Universidade Catolica in Rio de Janeiro and a former deputy governor of the Central Bank, noted that larger businesses are able to access loans at 12 percent to 15 percent a year. Not great by American standards, but “a lot better than 40 percent,” he said.

Why are interest rates so high? The simplest explanation is that the Selic is the federal government’s primary tool to control inflation, a boogeyman here since the devastating hyperinflation of the early 1990s. But Goldfajn added that reducing government spending would help matters: The government keeps interest rates high in part to crowd out other potential borrowers.

But that’s for the economists and policy wonks and market analysts to deal with. The lesson for the average Brazilian?

“It’s a much better world for people who have money, and a much worse world for people who owe money,” said Troster.

More GlobalPost dispatches by Seth Kugel:

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