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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.
``There's no money out there,'' said Apostagi, a project manager who asked that
the medical-equipment seller he works for not be identified to avoid alarming
international backers. ``We won't collapse, but everything's slowing to a crawl.
The whole world is scared and everyone's going a bit mad.''
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.
In Kiev, Ukraine, Yuriy Voloshyn, who works at a real-estate company, says he's
forgoing a new television because of his dollar-based mortgage. His monthly
payments have risen by 18 percent, or 1,000 hryvnias ($167), since he took out
the loan seven months ago.
No More Dreaming
``I only have money to pay for food and my monthly fee to the bank,'' Voloshyn,
25, said. ``I can't even dream about anything else.''
Rafal Mrowka, a driver from Ostrow Wielkopolski in western Poland, says he
became addicted to checking foreign-currency rates as monthly installments on
his Swiss-franc mortgage jumped 25 percent.
``I've even stopped getting nervous, now I can only laugh,'' the 32-year-old,
first-time property owner said.
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.
Governments are seeking to ease the pain as recession concerns sweep across
eastern Europe's emerging markets.
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.
The Hungarian central bank raised its benchmark interest rate by 3 percentage
points to 11.5 percent on Oct. 22 to defend the forint.
The same day, Prime Minister Ferenc Gyurcsany said the government was seeking an
accord with banks to ``prevent the burdens of debtors from reaching the sky.''
It's considering granting borrowers extended payment periods or the ability to
convert foreign-exchange debts into forint.
``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,'' said
Nikolett Gurubi, director of lending at Otthon Centrum Belvaros, the downtown
Budapest branch of a real estate agency.
Project manager Apostagi, 58, said he hopes the crisis will be over in a few
months, blaming U.S. banks for creating such distrust between lenders. For now,
``it looks like our signed contracts were for naught,'' he said.
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.
``It's not that we're bad,'' Isarescu said. ``It's that, culturally, we need to
prepare for the moment of repayment.''
At the other end of the spectrum, Turkish consumers have proved more cautious
after living through their own currency crises in 2001 and 1994. The government,
the IMF's biggest customer in recent years, is resisting new loans from the
fund, arguing that its economy can weather the credit crunch and a 22 percent
slump in the lira since the start of September.
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.
Mert Sevinc borrowed the equivalent of $100,000 in Turkish liras to buy an
Istanbul apartment in 2006, paying an annual rate of 13.5 percent. The marketing
consultant didn't even look at the foreign exchange loans at less than half that
``Of course it would have been cheaper to borrow in dollars or euros, but it's a
fairly basic principle of finance: Things that are cheaper are riskier,'' he said.