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On Top of a War, Ukraine Faces a Mortgage Crisis

Residential apartment blocks in Kiev, Ukraine

Photograph by Vincent Mundy/Bloomberg

Residential apartment blocks in Kiev, Ukraine

As central Kiev burned amid deadly street protests in February, Alex Bukovetskiy stopped paying off his dollar-denominated mortgage.

Kiev is calm now, but Bukovetskiy isn’t. He joined hundreds of angry borrowers at Parliament on June 19 to demand relief for holders of mortgages that bind the borrower to pay in dollars. Since the hryvnia lost 40 percent of its value following President Viktor Yanukovych’s ouster, the cost of making mortgage payments has ballooned. For Bukovetskiy, mortgage payments of $1,250 a month on his apartment now cost 14,912 hryvnia; they cost 6,250 hryvnia when he got the loan. “I don’t have that kind of money,” says Bukovetskiy, who dipped into savings to pay his mortgage after losing his marketing job. “I’m not hiding from my bank. But I want a compromise.”

Six months of turmoil have rocked Ukraine’s finances, turning the hryvnia into 2014’s worst performer vs. the dollar and prompting the government to seek a $17 billion bailout from the International Monetary Fund. The government is working to broker a deal between lenders and borrowers without harming the flow of credit, according to Pavlo Sheremeta, Ukraine’s economy minister.

Mortgage lenders in Ukraine, which include local banks as well as Russian and Austrian institutions, have issued only hryvnia-based home loans since the 2008 global financial crisis ravaged Ukraine’s economy. Before that, Ukrainians had piled into mortgages denominated in foreign currencies, attracted by a lower loan rate of 11.5 percent, well below hryvnia-denominated mortgage rates of 17 percent to 20 percent. Today, Ukrainian consumers owe $4 billion in foreign-currency home loans (48.3 billion hryvnia), or almost a quarter of total consumer lending.

Dollar-denominated loans were popular in the mid-2000s among consumers in emerging markets that enjoyed robust export growth and strengthening currencies. The deep recession changed the equation as emerging markets’ exports slowed and their currencies weakened. The Ukrainians’ pleas for help echo those of borrowers elsewhere. Following a dive in the forint, Hungary last year forced banks to swallow losses by easing the burden on people who’d taken out loans in Swiss francs. In Poland, the number of nonperforming home loans denominated in currencies other than the zloty rose for a sixth consecutive month in April.

In Ukraine, the ratio of banks’ nonperforming loans to their total lending will reach 30 percent this year, as credit costs rise, Moody’s Investors Service predicted in May. (By contrast, U.S. banks took loan-loss provisions of $263 billion in the first quarter of 2010, about 3.5 percent of all loans.) Ukraine had 87,091 foreign-currency home loans as of May 1, central bank data show.

Svitlana Miryanova, a mother of two who works as a product manager for a cosmetics distributor, says her dollar mortgage now swallows 70 percent of her monthly paycheck, up from 45 percent before. “The hryvnia devaluation is bleeding me dry.”

The protesters want a return to 2008’s hryvnia rate of 5 per dollar rather than the current 11.9. A Facebook (FB) group urging lawmakers to pressure lenders to show flexibility has 1,500 members. One of the group’s slogans: “No to foreign-currency slavery!”

“The government can’t ignore the situation,” says Olena Bilan, chief economist at Dragon Capital in Kiev. “It must take some action as this problem could cause social unrest.” Parliament has banned banks from repossessing homes. One proposal before Parliament would fix the hryvnia at a stronger exchange rate in loan contracts. The central bank is studying a cap on monthly repayments at end-of-2013 levels and stretching out the payment schedule of loans.

One fear is the hryvnia sinking below 12.5 to the dollar. At that level, the IMF estimates that the 22 largest banks would need to be recapitalized at a cost of as much as 5 percent of gross domestic product. Yet if this year’s hryvnia exchange rate can strengthen to 10.5 per dollar, the loan losses for Ukrainian banks would remain within the limits already set out by the IMF, said Vadim Khramov, an economist at Bank of America (BAC), by e-mail. “If the government can assure the IMF the proposed measures wouldn’t substantially increase costs to the budget, the [bailout] program is unlikely to change.”

Foreign banks have an interest in the resolution of Ukraine’s mortgage crisis. Austria’s Raiffeisen Bank International (RBI:AV) said recently that 2014 provisions against loan losses may rise by 22 percent, to €1.4 billion ($1.9 billion), rather than remain little changed as previously predicted, mainly because of events in Ukraine and Russia. Bukovetskiy says his lender is offering no respite. His bank’s press service declined to comment. “I’m not ready to spend all my money on debt repayments and go hungry,” he says.

The bottom line: Ukrainians owe banks $4 billion in foreign-currency home loans, one-quarter of the country’s consumer debt.

Krasnolutska is a reporter for Bloomberg News in Kiev.
Marchak is a reporter for Bloomberg News in Kiev.

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