From Bloomberg
October 31, 2008
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.
"What has been a factor of strength in recent years has now become a social weakness," said Tom Fallon, emerging-markets head in Paris at La Francaise des Placements, which manages $11 billion.
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.
Romania's leu dropped more than 14 percent against the dollar and 3.2 percent against the euro. Poland's zloty declined more than 17 percent against the dollar and 6.8 percent versus the euro, and Ukraine's hryvnia plunged 22 percent to the dollar and 11.5 percent to the euro.
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.
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 extra burden on borrowers is making a bad economic outlook worse, said Matthias Siller, who focuses on emerging markets at Baring Asset Management in London, where he manages about $4 billion.
If borrowers believe local interest rates are prohibitive and foreign currency lending dries up, it means ``a sharp deceleration in consumer spending,'' Siller said. ``That will bring serious problems for the economy.''
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.
Panicked customers are calling to say they're afraid the interest on their mortgages will go up or that they won't be able to secure mortgages.
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.
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