East Europe Bad Debt Legacy Holds Back Recovery, Raiffeisen Says
Delinquent loans in eastern European countries including Hungary, Ukraine, Slovenia and the Balkans are holding back economic recovery and may prevent capital from being spent productively, a study showed.
A total of 135 billion euros ($175 billion) of loans, or 10 percent of all borrowings, are overdue in the former communist part of Europe, according to a study by Raiffeisen Bank International AG (RBI), the Vienna-based lender that’s the second-biggest in the region. In countries with rates exceeding 10 percent, regulators and lenders need to prevent knock-on effects on the economy, the study released today in Istanbul said.
“In southeast Europe, Ukraine, Hungary and Slovenia, fairly high non-performing loan stocks and double-digit ratios in the range of 15 percent to 25 percent seem to become more and more a burden for the banking sectors and the economic recovery,” Raiffeisen analyst Gunter Deuber said in the study. “In these markets joint efforts to tackle NPLs and to improve the NPL workout” would be “reasonable.”
Western European lenders including Raiffeisen, UniCredit SpA (UCG) and Erste Group Bank AG (EBS) bankrolled eastern Europe’s boom with cheap loans before the 2008 credit crunch. In many countries, banks lent to households in euros or Swiss francs to bypass higher local interest rates, exacerbating the economic downturn when the region’s currencies weakened. Bad loans shot up since 2009 and are weighing on bank balance sheets.
Regulators and international lenders that have propped up countries in the region with emergency loans since 2008 are calling on banks and national regulators to resolve the bad debt issue by encouraging banks to write them off and move on.
“A well-balanced NPL restructuring within some challenging central and eastern European banking markets seems to be in the interest of all relevant stakeholders,” Deuber said in the report. “Nevertheless, any NPL resolution has to factor in the currently reduced earning capabilities in some of these markets.”
In several of the countries most affected by bad loans, the non-performing debt is linked to real-estate assets that lost value when property bubbles burst, Raiffeisen’s Deuber said. That leads to banks ending up with assets they seized as collateral for overdue loans, and are now waiting for prices to recover, instead of pursuing new lending business, he said.
“Capital remains locked in unproductive use,” Deuber said in the report. “A high NPL stock may even lead to unintended structural developments, as not the most productive investments will be financed, but just the ones that do not need large scale and long-term debt financing.”
Eastern Europe’s economic growth prospects have worsened as Russia and Poland are slowing significantly, the European Bank for Reconstruction and Development said yesterday.
The 30 eastern European and central Asian countries where the EBRD invests will expand 2.1 percent this year, the London-based lender said, cutting its January forecast of 3 percent. The economies, which expanded 2.5 percent last year, will grow 3.1 percent in 2014, the EBRD predicted.
The western-owned lenders that control the banking system in eastern Europe outside the former Soviet Union didn’t cause a credit crunch in the region or engaged in “deleveraging,” Raiffeisen said.
Total lending in euro terms rose 15 percent in 2012, bringing cumulative growth since 2010 to 22 percent, the study said. In the five years to 2017, loan growth will be briskest in Russia and Poland, at 13 percent and 10 percent a year, respectively, Raiffeisen estimates.
The bad debt burden isn’t present in the entire eastern European region. In Russia and Poland, the biggest banking markets, only 4.8 percent and 7.7 percent of loans are overdue, respectively, according to Raiffeisen. In the export-oriented Czech and Slovak republics, the rate is between 5 and 6 percent.
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