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Economics

Size matters

Survey shows that that high interest rates only benefit the financial system

Irritation, bad temper, sadness, weeping and gnashing of the teeth: the same thing every month. It is the meeting of the Copom, the BC’s Monetary Policy Committee, announcing one more increase in the Selic rate (the basic interest rate), which defines  the remuneration given by the government to those who buy government bonds. “In the light of international and Brazilian experience, increasing interest rates is the best way to combat inflation, a threat to be faced up to as a priority”, says the president of the BC, Henrique Meirelles. “Brazil is a country with an anomalous economy: we have the highest real basic interest rate in the world, and the lowest volume of credit over GDP in the world. What the economic policy has been doing to this country for two decades is a crime”, rebuts Professor Alberto Borges Matias, from the FEA-RP/USP, the author of the survey Estudo técnico  sobre as taxas de juros vigentes no Brasil (Technical study on the interest rates ruling in Brazi)l, in which, based on empirical data, he refutes the current justifications for high interest rates: controlling inflation, generating exchange rate stability, and selling government securities.

“The statistical correlation observed in the last 15 years between the interest rate and inflation is practically zero. The inflation is, in great measure, contracted, the fruit of the contracts from privatizing public services that indexed the readjustments to the IGPM (The country’s broadest price index, which includes wholesale prices and it is generally higher than the IPCA, the index the government uses for the inflation target). Rather, when the Selic rate is increased, inflation goes up with it, in a positive correlation of 15%”, he explains. The relationship between interest rates and the dollar, after freeing the exchange rates, indicates an insignificant correlation, of -8%. Nor do the high levels serve to prevent, according to the researcher, the flight of capital. Nobody believes that we can manage to survive with these interest rates, which at the same time make industrial investment viable. “Our industry has been scrapped and denationalized”, Matias warns. But those who think that this is a recent mistake are mistaken.

“For two decades, the governments, including the current one, have not know how to come out of the mousetrap set by the interest rates: the political pressure is strong, as major industrial concerns, commercial companies, political parties, exporters and even federal public-sector banks are dependent on high interest rates”, he says. According to Matias, the BC gave the government the apple of the ‘sin’ of interest in 1994, at the beginning of the Real Plan. Before that, despite the high inflation, there were cases of negative interest rates. The national financial system, inefficient and with its high costs of maintenance, maintained itself with the gains from the so-called float, the funds that came from customers’ demand deposits, from collections and from third party funds, which stayed temporarily in the financial institutions. Between 1994 and 1995, the gains from the float fell from R$ 9.3 billion to R$ 1 billion. For Matias, in three years after the Real started, the financial system was going into a collapse. To avoid a spate of bankruptcies, the government, claims the author, restructured its monetary policy.

“The Real Plan altered the way of financing the public deficit: instead of financing it via the issue of currency, it now did it by the issue of debt, or rather, of government securities”, the researcher explains. Then in 1995, the government was able to give back, in the form of high interest rates, what the banks had lost with the gains from the float: precisely R$ 8 billion. “The monetary policy centered on the high interest rates ended up perpetuating itself, since the banks became important financiers of electoral campaigns and, accordingly, they interfere directly in economic policy”, he says. The revenues of the financial institutions, from 1994, tripled because of the debt instruments. And whenever the Selic rate rose, these securities appreciate more.

“Almost half the banks’ revenues currently come from investments in these securities, which shows how, in part, interest rates are kept high for the banks to remain alive”, the researcher warrants. ‘Easy’ profit addicts: it is more attractive for the banks to allocate resources for debt instruments, with a good return and low risk, than to channel them towards credit for the private sector. “The government paid about R$ 40 billion in interest last year. The maintenance of this monetary policy may lead the country to an inflationary chaos”, Matias warns. The total volume of credit of the national financial system corresponds to only 24% of GDP (the demand is for 100%), while in Germany it is 164%. How to break this delicate relationship between creditor (banks) and debtor (Treasury)? The State has its coffers so committed with the internal debt, more and more because of the interest rates, that it has no money left over to invest even in the social areas.

“This model is going to lead the banks themselves to long term insolvency, for not having a volume of credit for operating and their structural costs being the highest in the world, which makes the maintenance of the model risky and with a tendency to create dependence”, the author observes. According to Matias, there has to be an expansionist credit policy, with a reduction of the compulsory deposits (money that the banks are obliged to stock in the BC) of the banking sector, slow and gradual, not least because it would not be possible to correct an anomaly of two decades in the short term. “With the expansion of credit, the interest rates fall, the spreads (the difference between what the bank pays to the investor to raised funds and how much the bank will charge for lending this same money) fall, there is an adjustment to bank profitability, the productive sector has an expansion from domestic demand, imports increase, there is a depreciation of the currency, exports grow, employment increases and income improves its distribution”, he explains. “Brazil is bound up in interest rates.” But there is a light at the end of the tunnel. “Historically, governments increase Selic outside the period of elections and reduce it on the eve of an election. We can wait for a reduction from Christmas onwards”, he warns.

The project
Construction of the monetary authority and democracy (nº 01/05568-8); Modality Thematic Project; Coordinator Lourdes Sola/USP; Investment R$ 476,600.00

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