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‘Insane’ Rates Spur Mantega to Gut BNDES Funding: Brazil Credit

Guido Mantega, finance minister of Brazil. Photographer: Andrew Harrer/Bloomberg
Guido Mantega, finance minister of Brazil. Photographer: Andrew Harrer/Bloomberg

Dec. 1 (Bloomberg) -- Brazil plans to cut funding for its state development bank by 50 percent next year in an effort to bring down the world’s second-highest inflation-adjusted interest rates.

The reduction in loans the government provides to BNDES, as the bank is known, forms part of a plan to curb public spending, Finance Minister Guido Mantega said in an interview in Brasilia yesterday. Mantega, who was kept at his post by President-elect Dilma Rousseff, is seeking to cut subsidized lending that helped push inflation to a five-month high of 5.2 percent and drive up local borrowing costs.

The central bank will begin boosting the benchmark interest rate as soon as its next meeting on Dec. 8 and bring it to about 12.5 percent by the end of 2011, futures trading shows. Brazil, whose inflation-adjusted rates are second only to Croatia among 46 countries tracked by Bloomberg, is paying 965 basis points more to borrow locally than abroad. The country’s local debt yields more than that of Greece and Ireland, which are receiving aid from the European Union and International Monetary Fund.

“It’s insane when you look at the rates differentials” between Brazil and Greece, Pablo Cisilino, who helps manage $20 billion in emerging-market debt at Stone Harbor Investment in New York, said in a telephone interview. In Brazil, “they have an issue with real interest rates,” he said.

Rousseff’s government will cut the loans it provides to Rio de Janeiro-based BNDES from 104.7 billion reais ($61.3 billion) in 2010. It may also freeze more than 20 billion reais of the 2011 budget, Mantega said. Lending by the bank, which provides subsidized credit for long-term projects, is contributing to the fastest economic growth in more than two decades.


Latin America’s biggest economy will expand 7.6 percent this year after shrinking 0.2 percent in 2009, according to the median forecast in a central bank survey of economists published Nov. 29.

Policy makers boosted the benchmark overnight lending rate 200 basis points, or 2 percentage points, since April to 10.75 percent to prevent the economy from overheating. International investors, seeking alternatives to near-zero interest rates in the U.S., Europe and Japan, have poured money into Brazil’s fixed-income assets, sparking a two-year, 36 percent rally in the real that’s helped swell the current-account deficit to an annual record of $48 billion.

Mantega tripled a tax on foreign investors’ purchases of fixed-income assets in October to stem the real’s advance as other countries engage in what he has called a “currency war” to weaken their exchange rates and bolster exports.


“It is important to carry out this fiscal consolidation and help reduce interest rates, because this will end up helping the currency, too,” Mantega, 61, said. The real is trading at a “reasonable” level as the European debt crisis brings a temporary “truce” to the global currency war, he said.

The 965 basis-point gap between Brazilian local bonds due in 2017 and its overseas debt on Nov. 22 was the biggest in two years, according to data compiled by Bloomberg. By contrast, the yield spread for similar securities issued by Mexico is 261 and 235 for Russia. Brazil’s 10-year bonds yield 59 more than Greek debt and 309 above Irish securities.

Ireland agreed to an 85 billion-euro ($111.5 billion) aid package in November while Greece received a 110 billion-euro rescue in May.

“At this moment there’s an anomaly,” Michael Roche, an emerging-market strategist at MF Global Holdings Ltd. in New York, said in a telephone interview. “Brazil’s domestic rates are well in excess of even other emerging markets and it’s proven to be a challenge for them to manage their monetary domestic affairs because of that.”

Yield Spread

The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. Treasuries fell 16 basis points to 182 at 5:44 p.m. New York time, according to JPMorgan Chase Co.

The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps fell six basis points to 117, according to data compiled by CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The real rose 0.6 percent to 1.7049 per dollar.

The yield on Brazil’s overnight interest-rate futures contract due in January 2012 rose 14 basis points to 12.13 percent.

The government’s plan to cut BNDES funding by half is not enough to help the central bank control inflation, said Felipe Salto, an economist at Sao Paulo-based research firm Tendecias Consultoria Integrada.

“Mantega’s fiscal austerity speech doesn’t match with the possibility of the Treasury lending another 50 billion reais to the BNDES,” Salto said in a telephone interview. “The burden of inflation control will continue with the central bank.”

Subsidized Rate

Rousseff, President Luiz Inacio Lula da Silva’s former cabinet chief, tapped Alexandre Tombini to head the central bank last week. Tombini, who needs Senate confirmation, has served on the bank’s board since 2005.

BNDES’ lending rate, which is set by the National Monetary Council that Mantega heads, has been kept at 6 percent since July 2009.

BNDES granted 171 billion reais of new loans in the 12 months through October, a 33 percent jump over the same year-ago period, according to the bank’s website. BNDES more than doubled lending to Brazilian companies to 137.4 billion reais last year, exceeding the $72.2 billion lent globally by the World Bank in the fiscal year ended in June.

Reducing BNDES funding “is what they need to do in order to reduce real rates,” said Stone Harbor’s Cisilino. “Local investors in particular will like to see the execution of the announcements. This is very positive.”

To contact the reporters on this story: Tal Barak Harif in New York at; Andre Soliani in Brasilia at

To contact the editor responsible for this story: David Papadopoulos at

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