For more from the Reuters Central European Investment
Summit, click on:
http://www.reuters.com/summit/CentralEuropeanInvestment09?pid=500
By Boris Groendahl
VIENNA, Sept 28 (Reuters) - European Central Bank governing
council member Ewald Nowotny called for tighter restrictions on
foreign currency lending in eastern Europe on Monday, saying it
had no place in credit for ordinary consumers.
Speaking at the Reuters Central European Investment Summit,
Nowotny -- who oversees some of emerging Europe's biggest
lenders as head of the Austrian central bank -- said general
rules were needed if banks' self-regulation did not help.
"There is a very clear message, both from the local
regulators and from the home regulator in Austria that we want
to discourage foreign currency lending," Nowotny told the summit
at the Reuters office in Vienna.
"It is not about forbidding it altogether. There are some
ways to have a financial hedge where it may make sense. But for
instance financing the real estate infrastructure of a country
just by foreign currency lending has been a mistake."
"There is no way to deny that FX lending has substantial
macroeconomic risks."
Preemptive action by central banks and ratings agency
warnings last year that the region could become the "sub-prime
of Europe" helped encourage lenders to cut back low-interest
rate lending in euros or francs in Poland, Hungary and others.
But managers from leading emerging European banks, also at
the Reuters summit, said retail lending in foreign currencies
was here to stay as they battle to restart growth in the region.
"There will be more reluctance to lend in foreign
currencies, but it won't work without them, in particular in
countries where interest rates are high," said Martin Gruell,
Chief Financial Officer with Raiffeisen International <RIBH.VI>,
eastern Europe's second biggest lender.
POPULAR
Borrowing in hard currencies allowed ordinary consumers in
countries like Poland, Hungary or the Baltic Sea states to avoid
punitive interest rates at home and remained a big driver of
overall loan growth after they joined the EU in 2004.
But such lending was one of the reasons behind the Asian
financial crisis in 1997, and its prevalence in central and
eastern Europe stoked fears of a similar meltdown.
It exposes borrowers to the risk that their debt payments
rise sharply if their local currency drops -- especially retail
customers who do not have revenues in the foreign currency.
Banks then face an increased risk that such debt defaults.
Speaking elsewhere, European Central Bank President Jean
Claude Trichet said Brussels' watchdog the European Systemic
Risk Board could be asked to look at moves on the issue.
"The idea of looking at this question of loans in foreign
currencies ... is typically one issue that could be examined at
the level of the ESRB," he said.
"The ESRB is an institution by definition of the 27 (EU
members)... We have to make a judgement at the level of the
risks for the 27.
But Federico Ghizzoni, head of CEE Banking Operations with
regional leader UniCredit <CRDI.MI>, also said that FX lending
would be back in the future, even though that lending in
currencies other than the euro has virtually disappeared.
"I'm not expecting, to be honest, a real decrease in FX
lending to individuals," he told the Summit. "What we can notice
is that FX lending in Swiss francs basically disappeared."
"The euro is the new currency, especially in countries where
there is a process of convergence. In countries already in the
EU, the euro is substituting (for) dollars and Swiss (francs)."
REGULATORS MAY CRACK DOWN
Nowotny said the only justification for FX lending was if
there was a "natural hedge" in the form of revenue in the
lending currency -- pointing to the region's successful
exporters.
"Of course the incentive is high if you have higher local
interest rates, but there is a reason why you have high local
interest rates, and it makes no sense to undermine this policy
of the local central bank by forex lending," Nowotny said.
Nowotny's central bank and financial watchdog FMA have
already cracked down on FX retail lending in Austria, the only
euro zone country in which this practice is a relevant factor
with around 30 percent of retail loans in foreign currencies.
Using a mixture of persuasion and arm-twisting, they won
over Austria's main banks -- all of which are among central and
Eastern Europe's biggest lenders -- to stop this practice, and
Nowotny recommended the same procedure in the east.
"This is a matter for the host countries, they have to act,"
he said. "The first approach is an approach of self-restriction.
If this does not work then there have to be some regulatory
measures."
(Additional reporting by Eva Komarek and Sylvia Westall in
Vienna and Jo Winterbottom and Ian Simpson in Milan; writing by
Boris Groendahl; editing by Patrick Graham)
