August 5, 2011 / 8:43 PM / in 8 years

UPDATE 1-Brazil's BNDES sees credit market freeze comeback

* BNDES’ Coutinho recommends refraining from rate hikes

* Says chances are of a credit market seizure

* BNDES acted as lender of last resort during 2008 crisis (Adds details on Coutinho, background on BNDES actions during crisis, market performance in paragraphs 1-10)

By Sergio Spagnuolo and Guillermo Parra-Bernal

SAO PAULO, Aug 5 (Reuters) - Credit markets are on the verge of a seizure similar to the one the world experienced in late 2008 and led to the worst global recession in seven decades, a top Brazil government official said on Friday.

The worsening of a debt crisis in Western Europe is contaminating the U.S. markets, and is concentrating liquidity on central banks — a fact that could create a dearth of funds in the world’s biggest interbank markets, said Luciano Coutinho, president of the state development bank BNDES.

Coutinho, who as BNDES chief helped provide local commercial banks with cash at the height of the 2008 financial crisis, urged the central bank to halt interest-rate hikes to fight inflation. Policymakers raised borrowing costs for a fifth time this year to the highest level since January 2009.

“We are on the verge of a situation that could replicate a double-dipped recession, a tad different (from the one seen in 2008,) and a paralysis of credit in international markets,” Coutinho said at an event in Sao Paulo.

Coutinho’s remarks signal that government officials are growing concerned over the impact of slowing economic growth and uncertainty that has sparked a rout in global markets.

Brazil's benchmark Bovespa stock index .BVSP has shed about 15 percent in the past month, as a crisis of confidence mounted in Europe and the United States. [ID:nN1E7731OC]

Rapid action by the BNDES almost three years ago helped prevent a deep recession and instead paved the way for a rapid recovery in 2009 and 2010.

When markets unraveled in 2008, the government instructed BNDES to shore up debt-laden firms and foster mergers among those facing bankruptcy, easing fears of mass layoffs and company defaults in Latin America’s largest economy.

The role of the BNDES was key to avert a complete paralysis of local lending markets: in the six months through April 2009, state banks led by the BNDES boosted corporate loans by 20 percent, while private-sector banks raised them by just 2.5 percent.

Coutinho does not expect a seizure in the commercial loan markets in Brazil but said the government would act promptly if this happened.

“If we faced a banking crisis and credit gets clogged, the BNDES will have tools to expand credit with other state banks,” he said.

Editing by Chizu Nomiyama

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