BREAKINGVIEWS-Brazil's easy money squeezes banking weaklings

Tue Jun 5, 2012 9:06pm BST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Raul Gallegos

NEW YORK, June 5 (Reuters Breakingviews) - Brazil’s easy money policies have squeezed yet another of its banking weaklings. The country’s central bank seized consumer lender Banco Cruzeiro do Sul CZRS4.SA on Monday for “serious” financial violations. The episode serves as another example of a bank losing its way in Brazil’s lending frenzy.

The economy still looks pretty sound overall. Unemployment isn’t rising and household debt at 49 percent of income is better than America’s, for example. But thanks in part to government spending and monetary easing, loans are still growing at an alarming rate of 20 percent a year – five percentage points higher than in China. And non-performing consumer loans rose nearly one percentage point to 7.8 percent last year.

The big four banks seem to be managing this OK. It’s the mid-size lenders who appear to have gotten ahead of themselves. True, Brazilian press reports that Cruzeiro’s $637 million loss may have been the result of fraud adds a new wrinkle. But it looks like a badly run bank, regardless.

Its problem loans jumped sixfold in 2011 to 2.9 percent of all loans – far faster than giant Itau Unibanco’s, (ITUB4.SA) which rose by around a tenth. And along with other mid-size lenders in Brazil – and many global finance houses in the run-up to the 2007-2008 crisis – Cruzeiro was too reliant on less stable forms of funding. It met a quarter of its needs last year by selling loans into the securitization market. Another 25 percent came from selling debt to international investors.

As its funding options diminished, Cruzeiro was forced last October to tap the central bank for a $1.7 billion emergency line of credit, backed by loans. That’s almost a third of its total assets.

Cruzeiro’s decline continued, so the central bank tried to broker a sale to billionaire Andre Esteves’ BTG Pactual (BBTG11.SA). But Esteves, who bought troubled Banco PanAmericano in January 2011, begged off last week.

For now, Cruzeiro do Sul is being administered by the FGC, Brazil’s deposit insurance fund. Like its U.S. counterpart, the FDIC, it is funded by levies on banks. But it had to plough $5 billion into bailing out three other lenders that failed in the past 18 months. If these banks’ woes spread, whether through fraud or not, the FGC could be a lot busier.

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CONTEXT NEWS

- On June 4 Brazil's central bank seized troubled mid-sized lender Banco Cruzeiro do Sul after uncovering a series of irregularities. The central bank placed Cruzeiro under the administration of banking insurance deposit fund FGC for 180 days. It is the fourth time in the past year and a half that Brazil's government has intervened in a bank.

- Cruzeiro’s takeover came after an attempt to sell the bank to BTG Pactual fell through last week.

- Reuters: Brazil seizes troubled Cruzeiro do Sul bank [ID:nL1E8H410Y]

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(Editing by Antony Currie, Rob Cox and Martin Langfield)

((raul.gallegos@thomsonreuters.com)) Keywords: BREAKINGVIEWS BRAZIL/BANKS

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