Brazil's government under President Luiz Inácio Lula da Silva is studying the use of public money to buy old consumer debts that now sit in banks' portfolios and have little chance of recovery. The plan calls for a discount of up to 95% on the book value and opens the possibility that the government would waive collection after the purchase and treat the debts as settled. Details were reported by Folha de S.Paulo on Friday, based on an interview by Finance Minister Dario Durigan with the newspaper Extra.
According to Folha, the goal is to reduce household indebtedness and clean up bank balance sheets, since lenders have grown more restrictive on credit as defaults rise. The Treasury would provide the funds for the operation, the newspaper reported. The model under discussion is an auction in which creditors would sell the portfolios at a steep discount.
"We are moving toward a model in which we hold an auction and make it viable to buy this debt at a high discount, so that we don't have a big impact on the country's public accounts," Durigan said.
The minister said the program should be "a policy to clean people's names, especially the oldest debts, which the banks themselves, the companies themselves, have already lost hope of collecting". He said the proposal brings the president "a new program in which we can, with a large discount, buy back people's debt without them having to renegotiate again".
Impact on public accounts
The main obstacle is fiscal. Folha reports that settling the debts would hit the primary result the government must deliver to meet its fiscal target. The Central Bank, which keeps Brazil's official fiscal statistics, measures fiscal effort by changes in stocks of assets and liabilities. Because extinguishing the debts reduces the federal government's assets, the result worsens.
The idea has been in the works for months. In May, the Finance Ministry's economic reforms secretary, Regis Dudena, told Folha the government was studying measures for families with older debts: "There is still a public further along, with older debts. Many of these were tackled in Desenrola 1.0. President Lula's command is to look at whether it makes sense to reach these other groups." Desenrola Brasil, the federal debt renegotiation program that ran in two now-finished editions, brought some form of relief to 19 million people, according to Durigan. He cited motorcyclists and drivers who seek loans under the federal Move Brasil vehicle financing program and run into old defaults.
Campaign and next steps
The plan carries electoral weight. Brazil holds general elections in October, and a source heard by Folha said the measure was being designed to become a Lula campaign pledge, with a chance of quick implementation, possibly from November. Durigan confirmed the intent: "we are presenting (the proposal) for the president to take to the campaign".
The model is still being drafted. The minister said the proposal should reach Lula in the coming days. Who would buy the debts, what discount will apply and which types of debt will enter the program remain open questions. Bank and non-bank debts may be included, according to Durigan. "That is up to the president," he said.