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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Re: Banks cutting foreign currency loans in Eastern Europe

Posted by WARREN MOSLER on October 31st, 2008


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>   On Fri, Oct 31, 2008 at 7:25 AM, Bob wrote:
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`Panic’ Strikes East Europe Borrowers as Banks Cut Franc Loans

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.

Plunging Currencies

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.

‘Serious Problems’

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.

IMF Help

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.

Panicked Customers


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.


`Cheaper, Riskier’

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.”


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10 Responses to “Re: Banks cutting foreign currency loans in Eastern Europe”

  1. Milken Says:

    “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.”

    Certainly Warren you want obama and the fed to give these people US dollars so that they come into our borg collective and help the political goals of stamping out the KGB boyz right? You wouldn’t mind a little “wealth transfer” for that would you? My bible says give to those you can.

    Reply

  2. Winslow R. Says:

    You’ve said in the past the currency ‘carry trades’ were limited by regulation.

    Who made these dollar currency ‘loans’ to these foreign banks?

    I’d like to know who is being bailed out?

    Is the Fed now covering loans to foreign borrowers made by U.S. commercial banks, U.S. investment banks, U.S. SIVS, hedge funds?

    Or did these foreign banks make these eurodollar and swiss franc based loans without borrowing?

    From our past conversations it looks like it is foreign banks or hedge funds that are being bailed out. Neither of which are regulated by the Fed.

    Reply

  3. Matt Franko Says:

    From reading this article, it sounds like there are more problems in Europe with lending in currencies other than the US $.

    Resp,

    Reply

  4. Winslow R. Says:

    Matt “From reading this article, it sounds like there are more problems in Europe with lending in currencies other than the US $.”

    Without regulation, a bank can make loans/deposits in any currency it wants. Without regulation, a bank doesn’t even have to have capital in the currency it is making the loan/deposit.

    Why would a bank choose to denominate its loans in one currency over another?

    article “The bulk of eastern Europe’s credit boom was denominated in foreign currencies because they provided for cheaper financing.”

    It is just as easy for an unregulated Ukrainian bank to make a loan in dollars as it is in Ukrainian hryvnia. It chose to offer dollar loans, why? Did depositors think U.S. deposits in a Ukrainian bank would be safer from bank default and have less inflation from government ‘default’ so the bank could pay lower interest rates?

    It looks as the the choice to make loans in dollars or swiss francs had to do with maximizing the spread between the interest the bank would have to pay on deposits and the interest it could charge borrowers.

    Only if the dollar deposit is moved to another bank does the mismatch problem become apparent. As the potential for foreign bank failure grew, deposits were moved.

    Reply

  5. Matt Franko Says:

    Winslow,
    Thanks for the reply, I was just interested to see that the European banks have also done lending in foreign currencies other than the US$. I am concerned about potential Eurozone US $ liquidity needs and how much the Europeans will expect our US Fed to help them out with their problems. (“new Bretton Woods”!?)

    To the extent the European lenders have used Francs & Yen (vice US$) their Cen. Banks will need less US$ support.

    Resp,

    Reply

  6. warren.mosler Says:

    nice to see a discussion between people who understand monetary operations!

    agreed with all the issues.

    Reply

  7. Matt Franko Says:

    In a somewhat related matter, Ive been looking at the ECB and Fed websites, with respect to these currency swap lines…

    From what I can tell, it looks like the Fed and ECB are transacting these swaps via the FEDs TAF auctions. The TAF dates and the ECB US$ liquidity operations dates line right up and the ECB actually uses the letters “TAF” as a prefix in it’s reference numbers. For more details, see the ECBs Oct 13th communique here:

    http://www.ecb.europa.eu/mopo/implement/omo/html/communication.en.html#adhoc118

    (Sidenote: If you look at this Oct 13th ECB announcement, it is literally a cut and paste of the FEDs press release of the same date here:

    http://www.federalreserve.gov/newsevents/press/monetary/20081013a.htm

    Talk about “being on the same page”, these folks are on it!)

    The ECBs last 28-day US$ auction on October 21 for $102B is the day after the last FED TAF 28-day auction on October 20 for $113B, ie it looks like the last TAF was 90% for the benefit of European firms via the ECB.(I didnt see that reported on CNBC!) May say something about how “well” the US financial firms have become?

    If the ECB is indeed using the TAF, then maybe the other world central banks will use the TAF for transacting these swaps also. So watching the TAF results may provide more timely info. on these new global swap transactions than Ive been able to find otherwise.

    For the ECB the last 7-day US$ auction went for $92B, the last 28-day went for $102B, there are 84-day US$ auctions scheduled for Nov 3, Dec 1 and Dec 29 at the ECB. (BTW Same dates as FEDs TAF auctions)

    At the FED there are four 28 and/or 84 day TAF auctions for up to $150B each scheduled for the next two months, and 2 “forward” TAF auctions scheduled for November for up to $150B each. Six auctions for up to 150 each =$900B limit…..for now.

    ECB Auction link here
    http://www.ecb.int/mopo/implement/omo/html/top_history.en.html

    FED TAF Schedule here
    http://www.federalreserve.gov/monetarypolicy/tafschedule.htm

    Resp,

    Reply

  8. Milken Says:

    As the Belgian bank giant Fortis collapses, citizens of that country appreciate the bonheur of belonging to the eurozone. Had it not been for the euro, Belgium would have devalued and sharply increased interest rates — just as Iceland was forced to do. The banking and financial crisis is quickly changing perceptions. Across Europe, there is a bit of a scramble to join the euro. Politicians from Scandinavia to Eastern Europe, fearful of the abyss, are re-evaluating the wisdom of going it alone (Denmark, Sweden, Norway) or postponing structural reform (Hungary, Poland). Brazil and Mexico have secured a swap line from the Federal Reserve Bank. When it comes to liquidity conditions, size seems to matter after all

    ft.onet.pl/0,16602,now_they_see_the_benefits_of_the_eurozone,artykul_ft.html

    Reply

  9. warren.mosler Says:

    ‘Had it not been for the euro, Belgium would have devalued and sharply increased interest rates — just as Iceland was forced to do.’

    ONLY BECAUSE THEY DON’T UNDERSTAND WHAT THEIR OTHER OPTIONS ARE, LIKE SUSTAINING OUTPUT AND GROWTH VIA FISCAL MEASURES, SETTING INTEREST RATES WHERE THE WANT THEM FOR FURTHER PUBLIC PURPOSE (INCLUDING THE OPTION OF A ZERO RATE POLICY), AND LETTING PRIVATE CORPS WITH EXTERNAL CURRENCY DEBT PROBLEMS DEFAULT ON THEM AND CONVERT THEM TO EQUITY IN BANKRUPTCY WHILE SUSTAINING THE ONGOING BUSINESS AS DESIRED FOR FURTHER PUBLIC PURPOSE (KEEPING THE BANKS OPEN WHILE THEY ARE LEGALLY GETTING REORGANIZED) ETC. ETC.

    IT’S THE BLIND LEADING THE BLIND

    Reply

  10. Milken Says:

    “IT’S THE BLIND LEADING THE BLIND”

    No need to scream at me Warren! The three stooges used to play this theme song, three blind mice, they always made for great entertainment watching one silly stooge lead the other silly stooge. Sad to see you say that is how national governments are run these days. ;)

    http://www.youtube.com/watch?v=kPNC1WsVxdU

    Reply

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