FRANKFURT — No other region of the world suffered more grievous economic damage from the financial crisis last year than Eastern Europe, and a main cause was extensive borrowing in euros and other foreign currencies.
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 regional banking market are once again offering Eastern Europeans 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. 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.”
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. 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.
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Eastern Europeans Still Eager for Loans
FRANKFURT — No other region of the world suffered more grievous economic damage from the financial crisis last year than Eastern Europe, and a main cause was extensive borrowing in euros and other foreign currencies.
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 regional banking market are once again offering Eastern Europeans 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. 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.”
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. 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.
See the news in the making. Watch TimesCast, a daily news video.
A Room for Debate forum on whether tighter regulations could prevent future oil spills.
Even before the general strike, Nepal had entered an advanced state of entropy, writes Manjushree Thapa.
