Eastern Europeans Outside Euro-zone Still Hungry for Loans

When the currencies of countries like Hungary and Romania plunged last year, thousands of businesses and homeowners there found themselves stuck with some of the most extreme variable-interest-rate loans on the planet.

When the currencies of countries like Hungary and Romania plunged last year, thousands of businesses and homeowners there found themselves stuck with some of the most extreme variable-interest-rate loans on the planet.

When the currencies of countries like Hungary and Romania plunged last year, thousands of businesses and homeowners there found themselves stuck with some of the most extreme variable-interest-rate loans on the planet.

When the currencies of countries like Hungary and Romania plunged last year, thousands of businesses and homeowners there found themselves stuck with some of the most extreme variable-interest-rate loans on the planet.

Monthly payments soared, raising the threat of defaults and bank failures that was averted only with a joint rescue last year by the European Union and the International Monetary Fund — at a cost of €52 billion, or about $66 billion.

So it may come as a surprise that Austrian, Italian and other West European institutions that dominate the Eastern European banking market are once again offering the same kind of credit that nearly derailed their economies only a few months ago.

The revival of euro-based lending in countries that are not yet members of the euro zone unsettles many economists.

But others say a ban on foreign-currency loans would be counterproductive, because it would cut off a source of capital crucial for economic growth. [br]

Instead, developing countries in Europe need to create conditions for local-currency lending to flourish, including low inflation, said Erik Berglof, chief economist for the European Bank for Reconstruction and Development

“Regulation is part of the policy mix,” Mr. Berglof said. “But if you do it when you’re still in recession, you can do more harm than good,”according to this article in the New York Times.

Call it hair-of-the-dog economics.

For countries in the region to start growing again, businesses and consumers need the same kind of credit that bit them in the first place.

And bite them it did.

Gross domestic product in Hungary fell 6.3 percent last year, while in Romania it dropped 7.1 percent, in part because of the instability caused by foreign-currency lending.

Output in Latvia tumbled 18 percent after its leaders imposed severe austerity measures to avoid a currency devaluation that would have been disastrous for foreign-currency borrowers.

Loan defaults rose, but not as much as feared.

For example, nonperforming loans at Erste Bank grew to 8.5 percent in Eastern Europe at the end of March from 7.8 percent at the end of December.

By comparison, bad loans in Erste Bank’s home country, Austria, fell to 6.3 percent from 6.4 percent during that period.

Erste is the third-biggest lender in the region, after UniCredit, based in Milan, and Raiffeisen International, based in Vienna.

After the rescue, the local currencies recovered much of their value, taking the pressure off borrowers.

Poland and the Czech Republic felt the stress of foreign-currency lending as well, Mr. Berglof said. [br]

But they weathered the crisis much better and have emerged from recession.

Yet for many borrowers, the benefits of a loan denominated in euros are still compelling.

Loans denominated in the currencies of Hungary or Romania still carry much higher interest rates than loans linked to the euro.

The higher interest is a function of greater inflation than in Western Europe and sometimes imprudent fiscal policies by national governments.

In Hungary, payments on a typical mortgage of 7.5 million forints, or around $34,000, would come to about 85,000 forints a month, in a country where the average monthly salary is about 200,000 forints.

But a loan tied to euros would cost only the equivalent of 76,000 forints, or more than 10 percent less, according to data from Erste Bank.

Demand for foreign-currency loans, and banks’ willingness to issue them, seem to be holding steady.

In Hungary, foreign-currency loans slipped to 63 percent of the total at the end of 2009 from 68 percent in the first quarter of the year, but they still dominate.

But most of the decline was in loans denominated in more exotic currencies like the yen, which have all but disappeared from the market.

Euro-based loans actually rose in the fourth quarter, according to data from the Hungarian central bank.

In Romania, foreign-currency borrowing by consumers and businesses has edged up again, rising about 1 percent in March from a year earlier, according to the National Bank of Romania.

The risk for holders of euro loans remains.

If the local currency loses value, payments rise accordingly.

That is what happened last year; the forint lost more than a quarter of its value against the euro from July 2008 to March 2009 …

Banks say foreign-currency loans need not be any riskier than variable-rate loans if lenders take the right precautions,

like ensuring that borrowers have enough income to absorb the effect of currency rate fluctuations …

“Some of the pressure of the risk is now being removed because of the underlying recovery,” said Peter Brezinschek, chief economist at RZB Group, the parent of Raiffeisen.

In the meantime, the local and European Union authorities are trying to create a more robust market for local-currency loans.

There are signs that forint lending is rising after the Hungarian central bank steadily cut the benchmark interest rate by more than half since 2008, to 5.25 percent.

The cuts feed through to forint loans and make them more competitive with euro credit.

European institutions and central banks are also trying to encourage some of the other conditions for local-currency lending, like a vibrant bond market.

Banks need to be able to issue long-term bonds to cover long-term loans such as mortgages.