East Europe's Foreign-Loan Binge Draws Focus of Financial Risk Watchdog
Europe’s new risk watchdog may push eastern nations to tighten rules on foreign-currency loans that threaten economic stability throughout the region after making the issue one of its top priorities, banking officials said.
The European Systemic Risk Board, which met for the first time yesterday, was created by the European Union to identify and warn of potential risks to the financial system. It is chaired by European Central Bank President Jean-Claude Trichet.
The ESRB “has put this on top of its agenda,” said Piroska Nagy, a director at the European Bank for Reconstruction and Development who is leading the EBRD’s campaign to boost lending in local currencies, in an interview at the Euromoney conference Jan. 18 in Vienna. “This will help because it makes clear that this is a systemic issue at the regional level.”
Regulators have been seeking to wean east Europe off foreign-currency loans since the practice pushed some countries to the verge of default during the credit crisis. While such loans offer borrowers in emerging economies lower interest rates, they can lead to soaring payments if local currencies slump, as they did in Hungary, Poland, Romania and Ukraine.
In Hungary and Poland, almost two-thirds of all mortgages were denominated in Swiss francs or euros last September, according to UniCredit Strategic Analysis. In Romania, 94 percent of mortgages were in euros.
Most mortgages in Hungary are based on exchange rates of 145 forint to 165 forint to the franc, according to the Hungarian central bank. The current rate is 212 forint.
West European Banks
The ESRB yesterday appointed Polish central bank Governor Marek Belka, who has said he is prepared to use “brutal” measures to control foreign-currency loans, to its steering committee.
Foreign-currency loans are a “good example” of issues the ESRB could address, said Harald Ettl, head of Austrian watchdog FMA and a member of the ESRB’s general board, in a statement yesterday. Trichet declined to identify specific issues the board would take on.
The ECB was forced to take action in 2008 when credit seized up worldwide and banks in Austria, Italy or Germany, which control east Europe’s biggest lenders, had difficulty refinancing Swiss franc mortgages, car and consumer loans.
The ECB opened a lending facility in francs the month after Lehman Brothers Holdings Inc. collapsed in September 2008. At its peak, from February to June 2009, the facility pumped 25 billion euros ($33.8 billion) worth of francs into the market every week, according to ECB data.
Exacerbating the eastern Europe issue, Austrian borrowers also rely on foreign-currency loans. Unique in western Europe, almost a third of all Austrian household debt, or 37 billion euros, is held in currencies other than the euro, mainly francs.
Over the life of the ECB’s 7-day franc facility, which was terminated last February, Austrian bank bids were 28 percent of the total, rising as high as 45 percent in July 2009, according to a recent study by the Austrian central bank.
The Austrian central bank banned new franc lending to unhedged borrowers in 2008. The ECB, EBRD and International Monetary Fund are promoting lending in local currencies in eastern Europe, with mixed success.
Hungarian Prime Minister Viktor Orban’s ban on foreign- currency loans last year has been criticized by the IMF for risking a new credit crunch, especially since it came at the same time the government imposed a special bank tax and shifted privately managed pension funds to state control.
“It’s not a reform if you forbid foreign-exchange lending,” said IMF Senior Adviser Anne-Marie Gulde-Wolf in an interview in Vienna. “If you just put a lid on it you may have a lot of unintended consequences,” including curbing growth, she said.
Polish regulator KNF’s recommendation that banks tighten rules for foreign currency mortgages hasn’t stopped borrowers from seeking new loans. The Polish central bank said last month that “it would make sense to consider imposing a ban.”
Romania, meanwhile, continues to add to the inflow of new euro mortgages with government subsidies for first-time home owners.
Even if new loans can be stopped, many countries will struggle with a slowly falling stock of foreign-currency mortgages for years, keeping the risks for banks, borrowers and countries alive. Hungary’s regulator PZSAF advised banks this month to swap franc loans at least into euros.
“Principally, this is nothing bad,” Raiffeisen Chairman Herbert Stepic told reporters at the Euromoney conference. “My main question is: who absorbs and digests the losses?”
Decreasing the stock of foreign-currency loans will require some sort of “burden sharing” between banks, borrowers and other interested parties, said EBRD’s Nagy.
“The stock issue is a huge issue,” she said. “There has to be some more thinking” about how to deal with the losses that a conversion will create. “The last thing you want is to simply hit the banks again,” she said.
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