SAO PAULO, Dec 29 (Reuters) - Brazil's incoming finance minister, Joaquim Levy, said the government plans to reduce the weight of public banks in credit markets to bolster the economy with a bigger participation of private lenders.
In an interview published in the Valor Economico newspaper on Monday, Levy said the government has already started to reduce what he called "credit market duality" by lowering subsidies and raising interest rates used by state development bank BNDES.
"That will give an extraordinary support to the economy," said Levy, adding that the move would also strengthen monetary policy and eventually lower some of the world's highest interest rates.
President Dilma Rousseff named Levy, a former banker and fiscal conservative, to head her economic team in a second term in an effort to regain the trust of investors worried after four years of slow growth and high inflation.
Over the years, state-run banks have led credit disbursements in Brazil as private lenders remain more cautious after a spike in loan defaults following years of red-hot economic growth.
Levy said that the current policy of fiscal expansion to bolster the economy and halt a drop in job creation "is not in tune with reality and could be dangerous."
Levy reiterated that in the second term that starts in January the government will cut government spending by reducing subsidies such as the billions of dollars transferred to troubled electricity distributors. He added that the growing cost of electricity should be paid by consumers and not the government.
In another major shift in policy, Levy said the government should reduce trade barriers to open the economy and bolster competition.
"It is crucial to expand the perimeter of our economy," Levy said. "The expansion of our external trade even when the international economy remains weak is essential."
He said that more fiscal prudence combined with a bigger participation of private banks should lead to higher growth and avoid a credit downgrade in coming years. (Reporting by Reese Ewing)