Structural imbalances mean loan growth to remain weak

  • 2010-01-13
  • From wire reports

RIGA - Worries that Eastern Europe’s reliance on foreign-currency lending, a practice which brought some of the countries to the brink of default last year, continue to weigh on the region and poses a threat to its on-going  financial stability, says Fitch Ratings. “You could have a quick fix if you strengthened regulations and made foreign-currency lending really unattractive to banks,” said London-based Fitch senior director Michael Steinbarth, reports Bloomberg.
“But you still have to offer some kind of lending to the local economy.” He says that as long as “local-currency lending has interest rates that are too high to make it affordable, it makes us believe that there is no short-term solution.”

East European banks and their parents in Austria, Italy, Germany and Sweden have seen delinquent loans surge after last year’s currency drops in Poland, Hungary and Romania made debt servicing of foreign currency unaffordable for many households. Non- performing loans surged as sliding currencies pushed up repayment costs and the IMF needed to step in to rescue Hungary, Romania, Latvia and Ukraine as they could not finance external debt.
Foreign-currency denominated loans to households and businesses in Latvia account for 91 percent of the total, while in Estonia the ratio is 86.5 percent, show data from Fitch based on end-of-June figures.

Governments, regulators and international lenders are seeking ways of easing the region off its dependence on foreign financing. However, underdeveloped financial markets, low saving rates and high local interest rates remain, conditions which contributed to a surge in foreign currency loans during the boom years, believes the EBD.

The structural weaknesses of the economies and banking systems that encouraged foreign exchange borrowing are here to stay, says Steinbarth. He warns that foreign loans will continue to hamper banks’ asset quality until lenders are free of the existing stock of loans, which often includes mortgages that run to 30 years.
While banks have become more cautious in their lending, regulation that is too restrictive could stifle economic growth in these economies as they attempt to catch up with the West, he said.

“It would take some time to fix economies with structural imbalances,” said Steinbarth. “There are economies that have quite significant current account deficits that would have to be addressed by economic policies.” A fast-track euro adoption would resolve the issue of foreign-currency denominated loans by eliminating currency risk. The global crisis, though, has delayed this switch. “The introduction of the euro has been delayed in some countries,” by about three to five years, Steinbarth said.

The EBRD, a lender focusing on former communist states in eastern Europe and central Asia, has concentrated its efforts on persuading parent banks to stay committed to the region.
Steinbarth said there’s no guarantee that Western banks, still cleaning their books of toxic assets themselves, will keep supporting their eastern subsidiaries. Banks with smaller operations or branch networks in the region may decide to divest, he said. The biggest lenders, such as UniCredit, Societe Generale and Erste Bank will probably stay committed, even as lending growth promises to be much slower than in the boom years, Steinbarth said.

There’s a considerable risk that smaller banks will sell off their subsidiaries. Loan growth “will be much more contained. [The banks] might review their operations and sell.” The big banks have “made it clear that they consider central and eastern Europe as core activities. It seems less likely they would sell.”