Bankers calm over E.Europe loans

By Boris Groendahl

VIENNA (Reuters) - Central Europe's love affair with foreign currency loans needs careful management, but it does not pose a risk to stability, leading bankers in the region said.

Lending in low-interest currencies can make credit cheaper in countries where domestic rates are high and where borrowers expect their local currencies to remain stable or even appreciate over the maturity of their loans.

It is most rampant in the Baltics, where between 60 and 75 percent of all credit -- retail and corporate -- is in euros or dollars. Roughly half of Romanian, Bulgarian and Hungarian banks' loan books are in euros, dollars or Swiss francs, too.

The risk -- especially for less sophisticated and unhedged retail lenders -- is that a sharp drop in the local currency against the loan currency raises redemption rates. The risk for lenders is that this results in increasing defaults.

Yet bankers say this risk is limited by the fact that they are applying stricter lending standards to forex loans.

"We are in the risk business," Patrick Butler, chief financial officer of Raiffeisen Zentralbank (RZB), told the Reuters Central European Investment Summit in Vienna.

RZB's east European arm Raiffeisen International is the region's third-biggest bank.

"How do we cope with this risk? We point out the risks very, very clearly to the borrower. We ensure loan-to-value ratios are conservative. We ensure we're appropriately collateralized."

Others also point out that credit volume as a share of GDP is still so low in east Europe that strong credit growth is backed by fundamentals and even an economic necessity.

Nearly half of Raiffeisen International's 42 billion euro ($60 billion) loan book is foreign denominated, mostly in Poland and Hungary, and often in Swiss francs. The region's biggest bank, Italy's UniCredit, has around 20 to 25 percent of its central and eastern European loan book in forex loans.

Austria's Erste Bank, the No. 2, has lent about 20 percent, or 20 billion euros, of its outstanding loans in forex credit, mostly in Romania, Hungary and Croatia. At OTP of Hungary, just over a third of its loan portfolio is in foreign currencies, predominantly in euros and Swiss francs.

ASIAN PARALLEL

Skeptics paint a picture that more resembles east Asia on the verge of the 1997 financial crisis. They too had seen an economic boom fuelled by foreign money flowing into them, and saw the bubble burst when their currencies suddenly devaluated.

In the Baltics and in the Balkans, this risk looms as well and foreign banks active in those markets through their local subsidiaries may compound the exposure.

If they take a hit in one country, they may cut lending across the region, fuelling contagion.

"Foreign banks create a risk of cross-contagion," Christoph Rosenberg, the regional representative of the International Monetary Fund told the Reuters Central European Investment summit.

Swedish and Finnish banks are exposed to the Baltics while Austrian banks to central and south eastern Europe, he said.

Central banks in Poland and Hungary, but also in Austria, whose banking system is the most exposed in western Europe, have frequently sounded warnings about the risk of forex loans, but consumers have merrily continued to borrow.

"We feel that the parallels to Asia in 1997/1998 are very strong," said Ian Harnett of Absolute Strategy, a consultancy which started to point the problem out to clients after a report by the International Monetary Fund raised the issue in April.

"We think that those countries are unlikely to have currency stability if they are running current account deficits of 17 or 25 percent of GDP," Harnett said.

Once a currency devaluates, forex loan defaults are set to rise, may subsequently lead to forced asset sales, falling property prices and potentially even more defaults.

"There is no problem with non-performing loans if the economy is growing, if property prices rise, and inflation is under control," said Danske Bank analyst Lars Christensen.

"But in a situation where property prices are beginning to fall, that's different. We are not seeing that in south-eastern Europe yet, but we are seeing it quite dramatically in the Baltics," he said.

Hungary's OTP Bank, like Raiffeisen, played down this risk. Chief Financial Officer Laszlo Urban told the Reuters Summit that he trusted the country's central bank would intervene to stem a massive currency devaluation.

"If there was an outside shock that would result in a massive devaluation of the currency -- 20 percent plus -- for a prolonged period, that might have an impact undermining the loan portfolio," Urban said.

"But think of the central bank monetary board. Would they let that happen? I don't think so," he said.

(Additional reporting by Balazs Koranyi and David Chance)

(For summit blog: summitnotebook.reuters.com/)