What Caused Brazil’s Recession? (Hint: It Wasn’t Just Mortgage Debt)

Ballooning US mortgage debt was a major culprit behind the 2008–09 financial crisis. Mortgage debt also caused recessions in Australia, Canada, Spain, and elsewhere.

In Brazil, however, mortgage debt was one of several contributing factors in a severe recession, research finds. The Central Bank of Brazil’s Gabriel Garber, Princeton’s Atif Mian, Northwestern’s Jacopo Ponticelli, and Chicago Booth’s Amir Sufi find that while in some ways the global pattern of household (including mortgage) debt leading to recession extends to Brazil, a variety of factors contributed to its economic bust.

Researchers have spent the past decade unpacking the reasons for the 2008 global financial collapse—and studying booms and busts in individual countries. On the surface, Brazil’s situation appears to resemble that of other countries. Brazilians ran up their household debt fivefold before 2014, when the country then fell into one of the worst recessions in its history. Yet Brazil also had some unique factors at play.

To better understand what happened, the researchers tapped into a data set from the Central Bank of Brazil’s Credit Information System that provided detailed information on credit relationships between individuals and Brazil’s banks. Garber, Mian, Ponticelli, and Sufi extracted a sample covering 15 million people, looking at the type of debt they took on and their outstanding balances, as well as the interest rate and maturity of their loans. They then used data from the Annual Social Information Report (RAIS) to tie borrowers’ credit relationships to their individual labor incomes, to learn more about what types of household debt Brazilians assumed during the boom and how debt affected various segments of the population.

Brazil’s boom, which lasted longer than the three to five years typically seen elsewhere, actually resembles two booms, the researchers find. During the first, from 2003 to 2011, mortgage and credit-card debt rose, but so did auto loans, fueling a rise in car sales. Payroll loans, cash advances based on income, rose from around 20 billion BRL to almost 300 billion BRL (around $190 billion) in 2011. The researchers say this was linked to a 2003 law that allowed lenders to collateralize many of the loans, and thus to lower interest rates and lend more.