WRAPUP 1-Brazil boosts credit as economy nears recession

Wed Aug 20, 2014 3:34pm EDT

(Recasts throughout with new dateline, headline)

By Luciana Otoni

BRASILIA Aug 20 (Reuters) - Brazil's government unveiled a flurry of measures on Wednesday aimed at pumping credit into a languishing economy, its latest effort to avoid a recession as a tightly contested presidential election draws closer.

The Brazilian central bank increased the amount of capital available for commercial loans by at least 25 billion reais ($11.1 billion), the second such move in less than a month. The total potential stimulus offered by the central bank since July adds up to 70 billion reais ($31.1 billion).

Later in the day, Finance Minister Guido Mantega announced steps to boost mortgage and auto loans, including the creation of a new debt instrument to support real estate purchases.

"This will irrigate some segments of the economy that ran completely out of credit," Mantega told journalists as he announced the measures. "Credit retreated too sharply but will improve, though at a gradual pace."

Shoring up Brazil's sluggish economy has proven a hard task for President Dilma Rousseff since she took office in 2011. Signs of a possible recession have piled up in recent months, including job cuts in some sectors, despite a string of tax breaks and targeted subsidies.

Brazil's economy may have contracted nearly 1 percent in the second quarter, according to private estimates of gross domestic product data due out later this month. This could be a potential blow for Rousseff's hopes of getting re-elected in October.

Mantega said Brazil's economy is picking up speed gradually since July and blamed the recent slowdown on tight credit. Bank lending grew in June at the slowest pace in a decade, according to central bank data.

But the measures are likely to be largely ineffective as, rather than being constrained by available funding for banks, credit growth has been slowing down due to economic and political uncertainties ahead of the election, said Tony Volpon, head of emerging markets research at Nomura, in a research note.

He said the central bank steps were akin to pushing on a string. "Only after October will businesses and banks perhaps feel more confident in using the already ample resources they have in hand," Volpon wrote.

The bank took two steps on Wednesday. The first was to cut the amount of capital commercial banks must keep on deposit by about 10 billion reais.

Second, the bank cut the amount of capital that banks must have to back commercial loans. This is expected to add another 15 billion reais to lending over time.

Meanwhile, the Finance Ministry announced rules for the use of real estate as collateral for loans, created a new mechanism for banks to execute defaulted auto loans, and created a new covered bond to help banks fund housing credit.

The measures will not have any impact on inflation , which has remained within the official target range thanks to a series of recent interest rate increases by the central bank, Mantega said.

(1 dollar = 2.2496 Brazil reais) (Additional reporting by Walter Brandimarte, Jeb Blount and Patricia Duarte; Writing by Silvio Cascione; Editing by Lisa Shumaker)