* Fx lending "key vulnerability", needs "urgent action"
* EBRD initiative to create local currency capital markets
* Cooperates with banks, central banks, regulators, IFIs
By Boris Groendahl
ZAGREB, May 15 (Reuters) - The European Bank for
Reconstruction and Development is stepping up efforts to contain
the threat to emerging Europe's financial stability from its
appetite for loans in foreign currencies.
The main plank of its efforts are plans to invest in
developing the region's capital markets to help provide banks
with long-term funding in local currencies and to encourage
domestic savings, the development bank said on Saturday.
The enthusiasm of consumers and companies in the former
Communist bloc for borrowing in hard currencies for everything
from plasma screens to apartments to harvesters was one of the
main reasons the region teetered on the edge of a financial
abyss last year.
Credit growth in the region is still fledgling, but there is
little doubt that retail demand for loans in euros and Swiss
francs -- which carry lower interest than loans in local
currencies -- will return as the economies recover.
"The crisis laid bare the region's twin vulnerabilities of
excessive reliance on foreign capital and excessive use of
foreign exchange borrowing," said EBRD Chief Economist Erik
Berglof at the bank's annual meeting in Zagreb.
"As the recovery takes hold in the region, it is important
to urgently address these vulnerabilities," he said.
While there is broad agreement in public that foreign
currency lending -- which also was a major factor in Asian and
Latin American financial crises -- should be contained to make
the region's growth more sustainable, practical measures remain
elusive.
Only Hungary, a large user of foreign currency loans, has
issued stricter rules that effectively limit such lending to the
euro and to the most affluent borrowers. Other countries, and
the banks, fear that regulation alone may choke the nascent
economic recovery.
"We all believe we should restrict FX lending," said Herbert
Stepic, CEO of Austrian bank Raiffeisen International <RIBH.VI>,
the No.2 lender in the region, at the Zagreb meeting.
But he and his peers Andreas Treichl of Erste Group Bank
<ERST.VI> and Federico Ghizzoni of UniCredit <CRDI.MI> said that
ending FX lending was not possible without creating access to
reasonably priced, long-term funding in local currencies.
"We suggest to develop gradually a local capital market,"
Ghizzoni told Reuters Insider TV in Zagreb. "It cannot be done
in a few weeks or a few months. It will take some time."
PUTTING MONEY ON TABLE
This is where the EBRD, which was set up at the end of the
Cold War to help former communist economies adjust to free
markets, sees its role over the next year.
As eastern Europeans now realise that the path to euro
accession may be rockier than previously thought, one of the
main excuses for foreign currency lending has become much less
convincing.
"So much time and money has been wasted in the past to
create local currency capital markets," said Manfred Schepers,
the EBRD's finance chief. "Now there is a real willingness from
all sides. We can deliver many parts of the efforts."
Berglof said the initiative would over the next months pick
countries big enough to sustain a local capital market and would
focus its efforts on them. While he did not provide a list of
candidates, Hungary, Romania or Serbia would be likely targets.
In the countries chosen, the EBRD will raise its own lending
and borrowing in local currencies to help create liquid bond and
debt markets, and called on governments to also raise more debt
locally to help build a full yield curve.
The bank is also offering technical and regulatory advice to
create the market infrastructure necessary to create such
markets, and would invest in projects related to them.
However, one of the key elements in removing the fundamental
incentive for borrowing in foreign currencies -- the fact that
it is cheaper -- is outside the EBRD's control.
Ultimately, governments must pursue macroeconomic policies
that give domestic savers and foreign investors confidence
currencies will not be eroded by inflation.
"We should change our growth model," said Hungarian central
bank Vice Governor Julia Kiraly. "We should rely mainly on
internal savings. The main lesson is, don't borrow heavily from
international capital markets."
(Additional reporting by Zoran Radosavljevic, Mike Winfrey and
Gordana Filipovic in Zagreb; Editing by Ruth Pitchford)
