Idea of 50% "discount" on mortgage interest rates may have dangerous consequences for Latvian economy and society - SEB Banka

RIGA - The idea of a 50 percent "discount" on mortgage interest rates that Saeima is currently considering is a direct political intervention in the market pricing mechanism, which may have dangerous consequences for the Latvian economy and society, as SEB Banka CEO Ieva Tetere told LETA.

She said that such a "discount" for all borrowers, the majority of which do not and will not have solvency problems, would set a dangerous precedent, and Tetere suspects that not all MEPs are aware of the consequences of such a decision.

"In fact, it means that at any moment when profits are rising in a segment of the economy, the state can intervene by adjusting prices. Investors and the financial sector will be reluctant to invest in an unpredictable country where soviet-style price regulation and economic interference is making a comeback," says Tetere.

She explains that the long term, consequences of such political interference will be felt across the Latvian economy and society as a whole as lending will weaken. Most borrowers who will have received "discounts" are likely to be placed on the list of restructured clients and this status will have a negative impact on their ability to borrow in the future.

Such a decision would also have a further negative impact on the country's credit rating and Latvia's international reputation, which would make it more expensive for the country to borrow, explains Tetere, pointing out that, according to Standard&Poor's assessment, there are only three eurozone countries with a negative outlook, Latvia being one of them, which means that borrowing money, for example, for ten years is already 0.8 percentage points more expensive than the average for other eurozone countries.

Over the past six months, some politicians have made a deliberate effort to pit the public against banks, says Tetere, adding that first there were accusations of weak lending to businesses, ignoring the fact that there are far fewer creditworthy companies than there should be and wages in Latvia are lower because of the shadow economy, followed by accusations of weak competition in the banking sector and claims that banks earn too much. "A constant theme of politicians' communication has been, and continues to be, that banks are not forthcoming enough to residents, to borrowers," says Tetere.

Tetere emphasizes that this is not true. For example, SEB Banka has revised almost 1,000 mortgage contracts, being aware that daily expenses may now be more difficult for some families. Also, since the spring, SEB Banka has waived all commissions on mortgage loans, including commissions for amending contracts or switching banks.

Furthermore, every borrower who has encountered difficulties and has turned to the bank has received recommendations on how to stabilize the situation. These can include extending the loan contract, postponing loan payments for some time, and others.

A discussion on the mortgage market, with EURIBOR rates and people's payments rising, is indeed necessary, says Tetere, while stressing that the manipulative perception that there is a huge number of people in Latvia who cannot honor their loan obligations has created a breeding ground for inadequate decisions.