My Name is Paul H Cosentino. I started this Blog in 2011 because of what I believe to be wrongdoings in town government. This Blog is to keep the citizens of Templeton informed. It is also for the citizens of Templeton to post their comments and concerns.
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Wednesday, October 14, 2015
Brazil's Next Big Crisis Is Scaring Bankers and Wiping Out Jobs
Brazil's Next Big Crisis Is Scaring Bankers and Wiping Out Jobs
In the smog-filled, run-down industrial hubs that ring the southern end of Sao Paulo, Brazil’s next big crisis is taking root.
The labor market, long the country’s lone economic bright spot as growth stagnated, is suddenly deteriorating rapidly, driving
unemployment all the way up to 7.6 percent from a record-low 4.3 percent
at the end of 2014. Nowhere are the layoffs that are fueling that surge
more acute than here, in this gritty complex of steel, auto and
auto-parts factories built decades ago by the likes of Ford Motor Co.
and Volkswagen AG. Sao Paulo is now losing almost 20,000 jobs each and
every month, the state’s industrial federation estimates.
Talk
privately with Brazil’s most senior bankers and nearly all of them will
point to unemployment as a crucial concern. For starters, it’s
underpinning the national dissatisfaction that is fanning calls for the
impeachment of President Dilma Rousseff and creating policy paralysis in
the capital city of Brasilia. More importantly, in a country that has
based its growth model in recent years on a credit-fueled boom in
consumer spending, it threatens to both deepen the recession -- already the worst since 1990 -- and leave millions of Brazilians scrambling to repay their loans.
This is the situation that Rossini Santos finds himself in.
A
43-year-old steel worker, Santos had loaded up on debt to finance his
new middle-class lifestyle. First, it was an $80,000 mortgage back in
2009 to buy a little, one-story home near the factory he worked at.
Then, in early 2014, it was a $17,000 loan to purchase a Chevrolet
Prizm. Just months later, though, trouble began to brew when his
employer, a maker of castings for auto parts, filed for bankruptcy. The
company kept operating but was limping along, and in August, Santos was
fired with dozens of other workers. He’s now collecting 1,380 reais
($360) in unemployment insurance a month, just one-third of his steel
worker’s salary.
“And now I have a mortgage and a car loan,” he said. “And with no wage, I have to tighten my belt.”
Rossini Santos.
Photographer: Paulo Fridman/Bloomberg
One
year after a massive corruption scandal broke out at the state-run oil
company and four months after Brazil officially entered recession, the
financial indicators are grim across the board. The real has fallen more
than any other major currency in the world this year; annual inflation
has soared to almost 10 percent; the budget deficit has swelled to the
widest in at least two decades; and the government’s credit rating was
cut to junk by Standard & Poor’s. Last week, analysts at Itau
Unibanco Holding predicted the economy will shrink 3 percent this year
and unemployment will top 10 percent by 2016.
It
all marks quite a fall from grace for a BRIC nation that emerged from
the 2008 financial crisis so strongly that pundits were touting it as a
key engine for global growth alongside China. (The Economist splashed on
its cover the following year an image of Rio’s famed Christ the
Redeemer statue taking off like a rocket.) But commodities back then,
unlike now, were still in hot demand, bringing in a flood of cash to a
country that’s a dominant global exporter of everything from soybeans to
iron ore. The current corruption scandal -- which has hobbled
Rousseff’s deficit-cutting initiatives and hamstrung companies ensnared
in the probe -- as well as the effects of years of the government’s
interventionist measures have only deepened the slump.
That
the jobless rate, often a lagging indicator in any economy, has been
the last data point to buckle in the recession isn’t unusual, of course.
But what’s eye-catching here is how, after confounding local economists
by remaining so stubbornly low amid three years of sluggish growth, the
rate suddenly spiked higher in just a matter of months.
In a
week-long series of informal conversations with Sao Paulo bankers,
unemployment came up time and again as they laid out the reasons that
the recession and financial crisis could intensify. They’re worried that
the increase in the jobless rate has just begun; that it’s eroding
consumer demand, leaving once-crowded shopping malls empty; and that,
ultimately, it could drive up loan defaults.
Over the past decade,
Latin America’s largest economy underwent a spectacular credit boom
that helped pull some 40 million Brazilians into the middle class. Total
loans in the banking sector climbed five-fold over that time to 3.1
trillion reais. Family household indebtedness, as a percent of annual
income, jumped to 46 percent from 20 percent. Borrowing costs are rising
now -- the benchmark rate’s up to 14.25 percent -- as policy makers try
to curb inflation, and loan delinquencies are starting to inch up too.
In August, they accounted for 3.1 percent of all loans, the most in two
years.
"Everyone believes this crisis isn’t over," said Marcilio
Moreira, an ex-finance minister who formed part of the government team
in the early 1990s that struggled to tame hyperinflation. Brace for
things to get worse, he said, "in terms of production, inflation and
unemployment."
That’s bad news for Santos, the laid-off steel worker.
Work
is already plenty hard to find in his home town of Santo Andre. This is
the heart of the auto industry complex, the region that people in Sao
Paulo call the ABC. It’s Brazil’s version of Detroit. Names like General
Motors Co. and Daimler AG can be found on factories alongside
Volkswagen and Ford. And back in the 1970s, it was here that a young
labor leader named Luiz Inacio Lula da Silva -- Rousseff’s predecessor and mentor -- rose to national prominence.
Lula
is still revered in these parts. A picture of him posing with local
leaders hangs from the wall of the union office that Santos frequents.
The photo was taken back in 2010, the final year of his presidency. The
boom was still on then: the economy grew 7.6 percent that year; car
sales rose 30 percent. This year, sales are down 23 percent. And in
August, Sao Paulo state lost another 26,000 jobs, bringing the total
drop over the past 12 months to 216,000.
All of this is making
Santos uneasy. Those unemployment insurance checks he collects run out
around the end of the year. His loan payments keep coming due, every
month, until 2039.
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