Brazil has been on a credit binge. During the past five years credit growth has run at 2.4 times nominal gross domestic product. This compares with 2.0, 1.6 and 1.2 times for Russia, India and China respectively.

In spite of a fall in inflation to a manageable rate of 6 per cent, the banks in Brazil charge an average lending rate of approximately 25 per cent and, in the case of consumer lending, rates are well in excess of 30 per cent. This means that the Brazilian borrower base is paying “real” interest of circa 20-25 per cent against a norm of 1-3 per cent in most countries.

For consumers specifically, the ramifications are serious. The debt service burden has risen to 24 per cent of disposable income and is set to rise further as rates push higher. We expect the burden to rise to an exorbitant 30 per cent by 2012. To put this into context, the US consumer “blew up” when the debt service burden hit 14 per cent (with a current read of approximately 12 per cent). In other words, the Brazilian consumer has twice the debt load from a cash flow perspective than a US consumer who is still widely regarded as being over-leveraged.

The situation in Brazil is worryingly similar to the subprime crisis in the US. A lot of credit is being pushed by the banks at high rates to consumers who ultimately won’t be able to service the debt.

There are also unique features in Brazil. Risk management infrastructure has largely been missing in Brazil’s credit build-up, with a “positive” credit bureau still not yet approved as a result of consumer protection issues. A positive credit bureau shares credit history of all customers, whereas a negative bureau shares information for customers only in default, information that typically comes too late. This has enabled borrowers to build multiple lines of credit without the lenders’ knowledge especially because most loans are “unsecured” and there is no collateral involved.