Posted by WARREN MOSLER on October 31st, 2008
> On Fri, Oct 31, 2008 at 7:25 AM, Bob wrote:
By Ben Holland, Laura Cochrane and Balazs Penz
Oct. 31 (Bloomberg)- Imre Apostagi says the hospital upgrade he’s overseeing has stalled because his employer in Budapest can’t get a foreign-currency loan.
The company borrows in foreign currencies to avoid domestic interest rates as much as double those linked to dollars, euros and Swiss francs. Now banks are curtailing the loans as investors pull money out of eastern Europe’s developing markets and local currencies plunge.
Foreign-denominated loans helped fuel eastern European economies including Poland, Romania and Ukraine, funding home purchases and entrepreneurship after the region emerged from communism. The elimination of such lending is magnifying the global credit crunch and threatening to stall the expansion of some of Europe’s fastest-growing economies.
Since the end of August, the forint has fallen 16 percent against the Swiss franc, the currency of choice for Hungarian homebuyers, and more than 8 percent versus the euro. Foreign- currency loans make up 62 percent of all household debt in the country, up from 33 percent three years ago.
That’s even after a boost this week from an International Monetary Fund emergency loan program for emerging markets and the U.S. Federal Reserve’s decision to pump as much as $120 billion into Brazil, Mexico, South Korea and Singapore. The Fed said yesterday that it aims to “mitigate the spread of difficulties in obtaining U.S. dollar funding.”
Plunging domestic currencies mean higher monthly payments for businesses and households repaying foreign-denominated loans, forcing them to scale back spending.
No More Dreaming
The bulk of eastern Europe’s credit boom was denominated in foreign currencies because they provided for cheaper financing.
Before the current financial turmoil, Romanian banks typically charged 7 percent interest on a euro loan, compared with about 9.5 percent for those in leu. Romanians had about $36 billion of foreign-currency loans at the end of September, almost triple the figure two years earlier.
In Hungary, rates on Swiss franc loans were about half the forint rates. Consumers borrowed five times as much in foreign currencies as in forint in the three months through June.
Now banks including Munich-based Bayerische Landesbank and Austria’s Raiffeisen International Bank Holding AG are curbing foreign-currency loans in Hungary. In Poland, where 80 percent of mortgages are denominated in Swiss francs, Bank Millennium SA, Getin Bank SA and PKO Bank Polski SA have either boosted fees or stopped lending in the currency.
The east has been the fastest-growing part of Europe, with Romania’s economy expanding 9.3 percent in the year through June, Ukraine 6.5 percent and Poland 5.8 percent. The combined economy of the countries sharing the euro grew 1.4 percent in the period.
Ukraine, facing financial meltdown as the hryvnia drops and prices for exports such as steel tumble, on Oct. 26 agreed to a $16.5 billion loan from the IMF.
Hungary on Oct. 28 secured $26 billion in loans from the IMF, the EU and the World Bank. The government forecast a 1 percent economic contraction next year, the first since 1993.
These come with ‘conditions’ which means contractionary fiscal adjustments.
Romanian central bank Governor Mugur Isarescu sounded the alarm in June, saying the growth of foreign-currency loans was “excessively high and risky,” especially because Romanians with their communist past aren’t used to the discipline of debt.
Turkish savings in foreign currencies exceeded loans by about 30 percent as of the end of 2007, according to a January Fitch report. In Poland foreign exchange loans were double deposits, and in Hungary they were triple.
“We’ve been observing a return to a good old banking rule to lend in a currency in which people earn,” said Jan Krzysztof Bielecki, chief executive officer of Poland’s biggest lender, Bank Pekao SA. It stopped non-zloty lending in 2003. “Earlier, banks competed on the Swiss franc market watching only sales levels and not looking at keeping an acceptable risk level.”