Letter IEDI n. 1016–Monetary and credit measures to combat the coronavirus crisis in Brazil
The liquidity measures adopted by the Brazilian government played an important role in preventing the external shock (seen in March in the United States) together with the increased liquidity preference in the domestic market (due to the coronavirus crisis) from resulting in any relevant dysfunction in the national financial system.
An assessment of the measures to date shows a noticeable discrepancy between the expected and actual results. In terms of the liquidity measures, this can even be interpreted as a sign that the financial system was in a comfortable position before the crisis and, thus, did not have to resort to the monetary authority's lines. However, a discrepancy is also observed in the results obtained in the credit market.
So far, banks have not resumed their lending operations on the scale necessary to deal with the cash imbalance faced by households and companies. What can be seen in the bank credit market data up to the end of April is that the corporate segment did not experience an abrupt contraction, but credit to individuals shrank significantly.
In the case of loans to legal entities, March was marked by a significant increase in concessions, which may have been, to some extent, a reflection of the measures to facilitate loan renegotiation and capital release. These effects, however, should not be overestimated, since such behavior was not maintained in the following month.
The flow data do not allow segmentation by size, but the figures for total credit to legal entities illustrate that the expansion of operations took place basically in the segment of large companies. Another reflection of this is that the volume released via the line created to support smaller companies' jobs (Pese) was very low. Until June 8, the contracted volume was only BRL 3.8 billion, compared to an initial forecast of BRL 40 billion (just over 9%).
It is worth remembering that, unlike the initiatives adopted in 2008, which mainly used public financial institutions to reactivate credit, the current strategy has its backbone in the market. In other countries, such as Germany and China, public and development banks are at the center of the responses to the current crisis, but in Brazil the main option seems to be to let the market allocate credit in its own way.
The strategy of using public guarantee funds—FGO and FGI—to stimulate credit is also a bet on the allocation of resources in this same manner. The stock of capital operations available in May was around BRL 360 billion, according to Central Bank data. It is estimated that the investments in the two Funds, in the order of BRL 35.9 billion, will allow the granting of up to BRL 102 billion in guarantees, which is equivalent to 27% of the total stock of this type of credit.
These initiatives are likely to take off only during the current month of July, a time when several important imbalances in businesses' and households' balance sheets have already emerged. However, as they include credit risk mitigation mechanisms, they are expected to be more successful in stimulating the granting of loans by Brazilian banks.
Otherwise, the mismatches in balance sheets are going to accumulate even more, with an increase in insolvent units that will require even more robust action by the Brazilian government in terms of asset restructuring. This process, which is still going to have important developments in the coming months, will be an important condition for the recovery of the Brazilian economy.
Below, more details on the theme developed by economists Ernani Torres, Luiz Macahyba and Norberto Martins.