RIO DE JANEIRO – Francisco Xavier emerges from a payday loan shop, his brow more furrowed with worry than when he entered. His loan request was denied, and he has no idea how he is going to pay out-of-control bills, including credit card payments that gobble up nearly half his monthly income.
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Xavier, a taxi driver, is among the rapidly burgeoning ranks of "super debtors" — people who rose into the middle class during Brazil's nearly decade-long boom, but now find themselves drowning in debt as Latin America's largest economy stalls, causing inflation to heat up and unemployment to rise.
Brazil's top credit information bureaus estimate that as of April, more than 55 million Brazilians were behind on paying off credit cards or loans. That's 37 percent of the adult population in a country of about 200 million people, and the numbers are rising. According to the SPC credit information bureau, the lists have grown by an estimated 700,000 people since January, when the top credit bureaus began working together on combined lists for the first time.
Soraia Panella, coordinator of customer service at Rio de Janeiro's Procon consumer protection agency, said she routinely sees people living so close to the edge financially that any sudden misfortune can plunge them into a hole from which it's nearly impossible to climb out.
"The majority of people who come here break down in tears and cry and cry. They're ashamed and feel they have no way out," said Panella, whose team helps about 450 debtors consolidate their payments every day. "I think it's going to get much worse than it already is."
After peaking at 7.5 percent annual growth in 2010, Brazil's economy has steadily retreated. And this year, it contracted 0.2 percent in the first quarter and is forecast to fall more than 1 percent for the full year.
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The boom was fueled partly by China's hunger for Brazilian commodities, such as iron ore and soy. But the left-leaning governments of President Dilma Rousseff and especially her predecessor, Luiz Inacio Lula da Silva, also relied heavily on consumers for growth for about a decade. Among other things, the government used tax breaks to enoucrage car sales, ended a tax on big-ticket household goods, slashed interest rates and gave incentives to banks to expand credit for lower-middle class Brazilians.
Domestic consumption, which in 2004 accounted for 53 percent of Brazil's GDP, rose to 63 percent of the total in 2014. Consumers newly armed with credit cards and tax-break incentives snapped up flat-screen TVs, refrigerators, motor scooters and compact cars.
With access to easy credit and a tradition of paying for small-ticket items like tennis shoes or even groceries over several monthly installments, Brazilian consumers racked up such large bills that nearly 30 percent of disposable income now goes to servicing debt, the Central Bank says. By contrast, consumer debt servicing in the U.S. accounts for just over 5 percent of disposable income, according to the Federal Reserve.
That debt threatens to push some of the new middle class back into the ranks of the poor. The government's Agencia Brasil news agency reported late last year that the number of people in extreme poverty rose in 2013 for the first time in a decade, increasing 3.5 percent over the previous year. Figures for 2014 are not yet available.
Much of the problem, analysts say, lies in credit cards, which have been aggressively marketed to lower-income consumers.
Interest rates on Brazilian credit cards are astronomical, averaging around 200 percent a year, compared to about 12 percent in the U.S. Banks say the high rates are justified because they lack data on individuals' credit ratings, while critics contend banks are simply gouging customers. Whatever the cause, it means that one late payment can easily snowball into a giant debt.
"Credit cards are my temptation," said Xavier, the taxi driver. Appliances, furnishings for his new apartment and impulse splurging on things like clothing and perfume led to credit card payments that eat up half his roughly $2,000 monthly income. After rent and support for his four kids, Xavier said he is left with nearly nothing but regret at having the cards.
"I wish I'd have cut them into bits," he said.
Years of hyperinflation in the early 1990s habituated Brazilians such as Xavier to spend immediately lest they see the value of their money shrink overnight.
"Consumers in Brazil live on the limit," said the SPC's chief economist, Marcela Kawauti. "They spend everything they have every month ... and don't worry too much if they don't have anything to fall back on if something happens."
Rio resident Paulo Dutra Alves, whose only income is a $254 a month disability check due to a bad back, said his quality of life is crumbling.
After doctors diagnosed a hernia, Alves turned to a payday loan shop to pay for new medicines and cover back rent. With interest, that $540 loan has ballooned to $1,325 in just a few months. He has no idea how he'll pay it back and fears he'll soon find himself living on the street.
"I moved into a cheaper place, I stopped taking the bus and I've even cut down on food," Alves said. "There's nowhere else I can cut."
Jenny Barchfield on Twitter: www.twitter.com/jennybarchfield