A paper by the National Bureau of Economics Research entitled “Financial Crises, Credit Booms, and External Imbalances.” concluded that “credit growth emerges as the single best predictor of financial instability.” While much attention has been focused on China, there are credit booms across emerging markets as governments stimulated their economies during the 2008 financial crises, resulting in a similar credit growth profile to that which preceded the US crises.
Today, the WSJ covered the Brazilian lending boom in a story entitled “The Easy Credit That Fueled Brazil’s Boom Now Imperils It.” The left leaning Da Silva administration, using the state controlled Brazilian National Development Bank as the conduit, went on a lending spree.
Recently, Brazilian short term vs long term interest rates inverted, causing much consternation among strategists, given yield curve inversions historically have been a leading indicator of recessions and a weaker currency. Last month Deutsche Bank opined on whether Brazil is vulnerable to a sudden stop, and concluded no. But the article did highlight a strong surge in FDI inflows, another leading indicator of financial crises, according to Rogoff and Reinhart’s study of financial crises. Strong FDI inflows are prone to sudden reversals.
From today’s WSJ article :
- The development bank’s loans last year, just within Brazil, totaled triple the amount the World Bank lent to more than 100 countries.
- The bank funds a vast array of projects, such as below market loan rates to a paper mill, to fund dams, build ports, and facilitate corporate takeovers.
- The loans create inflation at the same time that the bank tries to cool the economy through higher interest rates
- Critics caution that this type of spending is likely politically driven and inefficient, and could lead to problems.
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