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Desperate times call for desperate measures amid Brazil’s burgeoning consumer debt crisis.
In the last weeks of his presidential campaign, Brazil’s incumbent President Luiz Inácio Lula da Silva has launched a raft of genuinely populist economic measures. This is testament not only to how much is riding on the election — from the extent of US-Israeli domination of Latin America to the future of Brazil’s “Pix” payments system and possibly even the BRICS alliance itself — but also to how close the contest is likely to be, with Lula statistically tied with his opponent, Flavio Bolsonaro, in most polls.
Last Friday (Sept 26), just over a week before the first round of the elections, on October 4, Lula signed a presidential order banning all forms of online gambling in a move designed to tackle the pervasive problem of families falling into debt. The ban extends not only to online casino gaming, as was expected, but also fixed-odds sports betting. In taking this action, Brazil has pulled the plug on its regulated online gambling market less than two years after its launch.
“I made the decision to take a hard, drastic and necessary measure,” he told journalists in São Paulo. “It’s like cancer, you take out the tumour, or the tumour will kill us.”
As we noted in our article on the proposed gambling ban, the policy appears to enjoy broad public support. Brazil, like the US, has developed a serious gambling problem since legalising fixed-odds sports betting in 2018. Like the US, it has emerged from nowhere to become one of the world’s biggest betting markets (#1 in the case of the US, #5 in the case of Brazil). As in the US, the spectacular growth has come at a heavy price for many Brazilian households:
In 2025, $68 billion was wagered via Pix, the country’s digital payments system, just one year after online gambling was fully legalised, reports Agência Publica. Of that money approximately $12 billion was lost, which is apparently equivalent to 0.68% of the gross national disposable income of Brazilian families. Many of those families are in Brazil’s poor and working classes — one of Lula’s core constituencies.
Lula’s provisional executive order went into force more or less straight away. New customer deposits were prohibited immediately, while betting websites and apps must go offline by October 6. That said, the order will need congressional approval within 120 days to remain in effect. For that to happen, not only will Lula have to hold on to the presidency but his Workers’ Party (PT) will have to command majorities, or at least strong positions, in both legislative chambers.
That is far from guaranteed. To improve his chances, Lula has announced a number of populist economic policies, or what his opponents may call “vote-buying measures”. They include an increase to the Bolsa Família welfare payments as well as measures aimed at reducing the cost of fuel.
At the tail end of last week, Lula launched his coup de grace: a multi-billion-dollar debt cancellation program to ease the financial pressures on low-income households after years of high borrowing costs. Perhaps the Brazilian president, or some of his advisors, have been reading Michael Hudson’s essays on how debt jubilees serve as a necessary tool for keeping rentiers from eating the entire economy (e.g., here, here and here).
The idea is quite simple: the government will buy up defaulted debts of up to 10,000 reais (c. $1900 USD) of working-class households, most of it resulting from unpaid credit card bills and personal loans not directly deducted from salaries. These debts are already in default, meaning that banks have zero chance of clawing their money back anyway. Instead, the government will use its financial muscle to buy up the debt for huge discounts of as much as 90%, which will be passed in their entirety to the households affected.
As Benjamin Norton noes, some critics are portraying the move as an indirect bailout of banks, but that does not seem to be the case here. Unlike with most bailouts of Western banks since 2008, the government is not planning to pay anywhere near face value of the debt, which is what the banks would ultimately want. At most, they will benefit from the deal by being able to get the debt off their books.
From Bloomberg:
Brazil’s government plans to spend 15 billion reais to buy as much as 150 billion reais ($28 billion) of delinquent consumer debt from banks, part of President Luiz Inácio Lula da Silva’s push to ease the financial strain on households and bolster his bid for a fourth term.
The government will hold an auction in November to acquire bank debt portfolios covering individual obligations of as much as 10,000 reais that are between two and four-and-a-half years old, Planning Minister Bruno Moretti told reporters on Friday.
Lula is signing a provisional measure authorizing the debt purchases and another banning online gambling in all of its forms.
According to Brazil’s Planning Minister Bruno Moretti, the idea is for the Brazilian state to intervene in the market by buying up to 50% of delinquent debts — around R$150 billion ($28 billion) — and pass on to families the discounts obtained at auctions. The debts in question will be overdue by between two and four and a half years – before the statute of limitations kick in – and for amounts of up to 10,000 reais.
An article in Argentina’s Clarin fleshes out some of the details:
The mechanism, according to Moretti, would replace the model in which “each person goes to the bank to try to renegotiate their own debt” with a centralised operation. In other words, the government would buy portfolios from financial institutions and carry out the restructuring with debtors.
The minister pointed out that this market already operates at steep discounts, because portfolios considered difficult to recover are usually sold with haircuts of between 90% and 95%. According to the estimate presented, the purchase of 150,000 million reais at a discount of 90% would have a fiscal cost of around 15,000 million reais.
Currently, he said, these private operations add up to approximately 50,000 million reais per year; with the program, the government would seek to triple that scale…
[T]he provisional measure includes guidelines for regulatory bodies, especially the Central Bank, with the aim of curbing abuses in the granting of credit and preventing families from falling back into situations of over-indebtedness.
It’s not hard to see why Lula feels the need to do this, though one could certainly question his choice of timing — i.e., nine days before the election. Despite relatively strong macroeconomic indicators — moderate economic growth, record low unemployment (just over 5%), rising average income levels, relatively low inflation (all things considered) — Brazil is facing a very serious household debt crisis.
The numbers speak for themselves.
The proportion of Brazilian households in debt stands at over 80%. Many, of course, are keeping up with instalments. However, according to credit research company Serasa, as of March this year the number of people in arrears had reached 82.8 million. That is slightly more than half of the entire adult population.
Total personal debt, including mortgage debt, now exceeds 900 billion dollars, which is equivalent to 35% of Brazil’s GDP, according to data from Brazil’s Central Bank. That compares to 29% in Colombia and 17% in Mexico but is still relatively low compared to the levels registered in North America and Western Europe. But the big difference is that most Brazilians pay a lot more in interest (the benchmark rate is currently 13.75%).
On average, almost a third of average disposable income now goes towards paying debt. As the graph below shows, courtesy of Phenomenal World, consumer debt as a proportion of disposable income, excluding mortgages, has more than doubled since 2003, the second year of Lula’s first term in office. Debt service costs meanwhile have surged from 17% to 27%.
There are many reasons why Brazil has seen this explosion in consumer debt over the past two decades. They include chronic high interest rates (currently at 13.75%, more than triple the official rate of inflation); the sharp rise in the cost of living since the COVID-19 pandemic; widespread job precariousness; the rapid digitalisation of finance, largely through the success of Pix, which has democratised access to credit; and the recent explosion of online gambling.
Meanwhile, the massive growth in personal debt fuelled a massive boom in consumer spending that was unmatched by productive economic activity. Nonetheless, Brazil is still seen as one of the world’s great success stories of financial inclusion. Some 60 million Brazilians have been “banked” in the past decade thanks to the expansion of the Internet, mobile phones and the unbridled popularity of Pix, the instant payments system created by the Central Bank of Brazil.
Now, many of the country’s households are paying the price of that success…
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