Brazilian household indebtedness eased only marginally in May, the first month of a broad government debt-renegotiation program launched by President Luiz Inacio Lula da Silva.

Debt Relief Program

Central bank data released on Thursday showed total household debt edged down to 49.8% in May from 49.9% in April, which had marked the highest level since the series began in 2011.

Lula launched in May a new phase of the so-called “Desenrola” debt-relief program, allowing borrowers in default earning up to five times the minimum wage to renegotiate debts.

Finance Minister Dario Durigan said earlier this week that the initiative, which uses government guarantees to secure lower borrowing costs, would be extended through the end of August.

Government figures show more than 3.6 million debt contracts have been renegotiated so far, reducing the original value of obligations to 4 billion reais ($781.36 million) from 22 billion reais.

Economic Impact

Lender BTG Pactual recently warned that elevated household debt could become a significant drag on Brazil’s economy in coming years.

Economists led by former central bank director Tiago Berriel pointed to the historical connection between rising household leverage and subsequent slowdowns in consumption and economic activity, citing the debt build-up and recession between 2011 and 2016.

“Compared with that period, households now exhibit higher indebtedness and debt service burdens. The composition of unsecured credit has deteriorated, with a larger share of higher-risk lending modalities,” they wrote.

Separately, central bank data showed outstanding loans in Brazil rose 0.7% in June from the previous month to 7.4 trillion reais. Annual credit growth accelerated to 9.7% from 9.6% in May.

A broad measure of household and corporate defaults in non-earmarked lending was unchanged at a record 6.2%.

Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.