BANKING & FINANCECentral & Eastern EuropeFINANCIAL TIMES SPECIAL REPORT | Friday May 20 2011
Regionfaces longhaul fromrecession
Emotions across cen-tral and easternEurope have runthe gamut since
2008, from fear of a regionalmeltdown to relief thatcatastrophe had beenaverted.
Now the mood has settledinto one of sober realism.
Many countries are realis-ing that the climb backfrom recession is going tobe long and hard. Growthwill not quickly, if ever,return to the levels of theyears before the collapse ofLehman Brothers triggeredthe global financial crisis.
Thanks to co-ordinatedinternational action, therewas not a single sovereigndefault across the formerCommunist bloc.
Many governments andauthorities – not to mentionpopulations – in the regionalso acted with a toughnessand determination to cor-rect fiscal and externalimbalances that put thosefarther west and south inEurope to shame.
Yet a series of factors hasleft the region’s perform-ance well behind emergingmarkets elsewhere in theworld. The legacy of wide-spread foreign-currencylending, the need to rebuildbalance sheets, the slug-gishness of the west Euro-pean market and concernsthat continuing eurozoneproblems could yet causecontagion farther east areall restraining growth.
The latest forecast fromthe European Bank forReconstruction and Devel-opment for growth this yearin its 29 countries of opera-tion was 4.2 per cent,broadly in line with globalforecasts.
“The region is in the mid-dle, between the [slower]growth of the advancedcountries, and the very fastgrowth of the emergingmarkets,” says ThomasMirow, EBRD president.
Tim Ash, head of emerg-ing markets research atRoyal Bank of Scotland,notes that Asian growth isback to pre-crisis levels,and Latin America perhapsonly half a percentage pointshort.
But “emerging” Europe’sgrowth is a “couple of per-centage points or more”behind its pre-2008 levels:“The question for me iswhat is going to propel theregion forward,” he says.“In the old days, it was for-eign direct investment, con-struction, real estate, credit– some of those arguablybad-quality growth drivers.Those drivers are not thereto the same extent now.”
The good news is that thestrong rebound in Germanindustrial production hashauled up countries whoseeconomies are tied into theGerman export machine,especially Poland, the CzechRepublic, Hungary andSlovakia.
That is the positive leg-acy of the “good” foreigninvestment that went, notinto inflating real estatebubbles, but turning centralEurope into a low-cost man-ufacturing centre.
Mr Ash warns, however,that foreign investment isno longer flowing into cen-tral European manufactur-ing as it was, largelybecause of the lacklustrewest European outlook.
“Manufacturing compa-nies don’t think Europe is aplace that is going to havegood growth,” he says.“They want to be in Asia orAfrica or Latin America.”
Other countries, such asRussia, Ukraine and Kaza-khstan, are bouncing back,thanks to high oil and com-modity prices. But there is
an almost universal prob-lem across the region.
“You have got a hugerecovery in industrial pro-duction – double digit inmany countries. What wehaven’t seen so far is thelabour market tighten, andwe have yet to see domesticdemand come back,” saysGillian Edgeworth, head ofEmerging Europe, MiddleEast and Africa (EEMEA)economics at UniCredit.
Along with the negativeeffect on spending of highunemployment, creditgrowth is being constrainedby the need for banks todeal with bad loans andrebuild capital reserves.While non-performing loansare coming down in severalcountries, there are ques-tions over the pace at whichlending will pick up.
“You are talking abouta banking sector that is
largely owned by foreignbanks,” says SimonQuijano-Evans, head ofresearch for EEMEA atING. “So it really dependson the health of the westEuropean banking sector,and how much capitalbanks are prepared to pro-vide their eastern Europeansubsidiaries with.”
Banks are unhappy atbank taxes imposed bysome countries, sayingthese will make it evenharder to meet the newBasel III rules on capital
adequacy: “I am critical ofmeasures such as the sub-stantial bank levies in Hun-gary and Austria, becausethey are not implementedon an EU – or, ideally, glo-bal – level and thus distortcompetition,” says HerbertStepic, chief executive ofRaiffeisen Bank Interna-tional.
Another big problem isthe burden of loans takenout during the good timesin euros, Swiss francs, oreven yen, when it wascheaper to borrow in thosecurrencies.
After many local curren-cies depreciated during thecrisis, those loans are muchmore expensive to service.Countries such as Hungaryare looking at tackling theproblem by fixing repay-ment rates – but, even withexchange rates recovering,that still leaves the capitalto be repaid.
The EBRD and interna-tional financial institutionshave made progress in aninitiative launched last yearto develop local-currencycapital markets to boost theavailability of domesticlending. But the programmewill take some years to bearfruit.
Even in healthier econo-mies that suffer less fromthe foreign-exchange loanoverhang, such as theCzech Republic, consumersare cautious.
While the risks of directcontagion from the eurozoneproblems are limited – bar-ring an outright catastrophe– the travails of Greece, Ire-land and Portugal are stillcasting a pall.
The need for continuingfiscal consolidation, too, isa constraint on aggregatedemand. Poland, in particu-lar, is under pressure totake tough measures tonarrow a budget deficit thatspiralled in part because ofits anti-crisis measures,once it gets through parlia-mentary elections thisautumn.
Finally, high inflationreflecting sharp increasesin oil and food prices,against a backdrop of lowwage increases, is squeez-ing already crunched house-hold budgets.
Hungary, Russia, Serbia,and Poland – most recentlylast week – have raisedinterest rates in response.Other central bankersacross emerging Europe arefacing ticklish decisions onwhen or whether to do thesame.
But with energy and foodprices levelling off, withlimited pricing pressureselsewhere, inflation couldstart to fall steeply within ayear. If that coincides withfalling unemployment,thanks to continuinggrowth in German exports,it could finally give domes-tic demand the shot in thearm it needs.
“The way is being pre-pared for household con-sumption to pick up,” saysMr Quijano-Evans. “Youwill start to see the domesticconsumer gradually havingincreasing budget power.”
Even then, longer-termchallenges remain. One isthe initiative to developlocal-currency finance –not least to reduce theregion’s vulnerability tofuture crises.
Catastrophe was averted but a seriesof factors have combined to makerecovery more difficult, says Neil Buckley
The only way is up: Primeminister Donald Tusk
presents the Polish logofor the EU presidency Epa
InsidePoland Overseas bankswant to offload assetsPage 2
Czech and Slovakoptimism Differentcurrencies, similarcircumstances Page 2
Russian consolidationState banks gainedfrom the crisisPage 2
Private equityConfidence is startingto return Page 2
Pension reformAlternative approachesto funding Page 3
Bad debts Pursuingdebtors is a lucrativebusiness Page 3
Infrastructure Regionlooks to public privatepartnerships Page 4
Swiss franc loansRestructuring may berequired Page 4
Capital markets Localfunding is importantPage 4
Balkan eurobondsNew sources of financefor region Page 4
Video on FT.com
EasternEurope editorNeil Buckleydiscussesissues facingthe region’sbanks
FT.com/CEEfocus
www.ft.com/CEEbankingfinance2011 | twitter.com/ftreports
Mr Mirow of the EBRDsuggests, too, that if theywant to get up to anythinglike the growth rates of themost dynamic emerging
markets, CEE countriesmust address “shortcom-ings” in competitiveness andattractiveness to investors.
“One is a continued need
to improve the legal situa-tion, to enhance anti-fraudand anti-corruption meas-ures, and so improve thebusiness environment,” he
says. “The other is thenecessity for moreadvanced countries tocreate knowledge-basedeconomies.”
‘Manufacturingcompanies don’tthink Europeis going to havegood growth’
2 ★ FINANCIAL TIMES FRIDAY MAY 20 2011
Central & Eastern Europe: Banking & Finance
Confidence starts to return along with the investors
Private-equity dealmakingin central and easternEurope is finally picking upfollowing the crisis butterms are tougher andfunds are more cautious.
During the final monthsof 2010 and the first quarterof this year there was anoticeable increase in dealnewsflow as private equityhouses tested the watersand began to work througha backlog of projects.
Private equity invest-ments in central and east-ern Europe and the Com-
monwealth of IndependentStates were $1.2bn in thefirst quarter of 2011, com-pared with $2.4bn in thewhole of 2010, the EmergingMarkets Private EquityAssociation says.
Industry players reportthat funds need to put upmore equity to financedeals than was the case inthe boom years but not asmuch as banks demandedat the height of the crisis.
“Terms aren’t what theywere at the [market’s] peak,but we are taking steps inthat direction – leverage ismoving up and the willing-ness of banks to underwriteis back. Pricing is not whatit was at the peak butcomes in a little bit on eachdeal,” says Craig Butcher ofMid-Europa Partners, a pri-vate equity investment firmfocused on central Europe.
Private equity investment
in the region is still only afraction of that in westernEurope, which in 2010amounted to some $52bn.Nevertheless confidence isagain close to pre-crisis lev-els, according to a Deloittesurvey of central Europeanprivate equity groups,which in November foundtwo-thirds of respondentsexpected to see an increasein deal activity in the com-ing six months.
“From our point of viewwe now have stability ofsorts. Valuations have gotto a constant level, equitymarkets have stabilised,currencies have stabilised –no one thinks any morethat things are going toblow up tomorrow,” saysMr Butcher. “I think it’sgoing to be a great year forthe region.”
Mid-Europa, which has€3.2bn under management,
in February announced the€400m acquisition of Zabka,a Polish convenience storechain from Penta Invest-ments, the Czech and Slo-vak investment firm. Thatfollowed its €600m sale ofAster, a Polish cable opera-tor, in December and the€574m sale of a Czech radio,data and telecoms com-pany.
Other high-profile dealsinclude Summit Partners,the US-based private equityand venture capital firm,which in August agreed toacquire a minority stake inAvast Software, the Czechantivirus software devel-oper for $100m. Meanwhile,Epic, the Vienna-basedinvestment house and M&Aadviser, in February agreedto buy 93 per cent ofUkrtelecom, the Ukrainianfixed-line phone operator,for $1.3bn.
By far the biggest ongo-ing transaction however,concerns Polkomtel, thePolish mobile operator,which is thought to beworth more than 19bnzlotys ($7bn).
The transaction hasattracted interest from pri-
vate equity groups ApaxPartners and Bain Capital,who are thought to havepartnered with possible sec-toral investors seeking totake control of Polkomtel.
“Polkomtel is definitely a
big deal,” says Robert Feuerfrom Warburg Pincus, theprivate equity firm.
Poland, with the largesteconomy in central Europeand now a financial hub forthe region, has becomesomething of a hotspot forprivate equity.
About half Poland’s dealflow comes from largercompanies such as TPSA,the former telephonemonopoly, selling off sub-sidiaries to concentrate onits core business, or fromforeign companies such asScandinavia’s Vattenfall,which are reconsideringtheir Polish investments.Vattenfall is selling about€1.5bn of Polish assets as itretreats from the country.
“These are top of the mar-ket deals ... and they areattracting top-tier playersfrom around the world,”says Tomasz Zorawski, a
partner at Linklaters, theglobal law firm.
Other deals, many in the€100m range and below, arefrom Polish entrepreneursselling their businesses orraising capital.
“These are [Polish] com-panies that were founded15-20 years ago which havegrown into quite sizeablestructures and you see nowprivate equity funds mov-ing in acquiring them todevelop them further,” saysHeinrich Pecina of ViennaCapital Partners.
In spite of its size, theRussian economy has so farfailed to attract significantprivate equity income dueto continuing worries aboutits investment climate.
To tackle this image prob-lem, Russian presidentDmitry Medvedev in Marchlaunched a $10bn state-backed private equity fund
that will make investmentsalongside the big global pri-vate equity groups.
“Russia is a different ballgame, but I think the gov-ernment is serious in tryingto attract private equitycapital,” says Mr Pecina.
Large deals such asPolkomtel remain theexception and the big USprivate equity houses havelittle reason to venture farfrom large markets such asPoland and Turkey, if theyinvest in the region at all.
This has left room forsmaller, niche players withlocal knowledge:
“What is needed is experi-enced, really entrepreneur-ial, hands-on people whowant to buy, build anddevelop companies and whounderstand the local mar-ket, people, language andcustoms,” says VCP’s MrPecina.
Slovak andCzech bankprofits revive
The Czech Republic andSlovakia went into the eco-nomic crisis with very simi-lar economies and bankingsystems, except for onefactor: Slovakia had becomethe newest member of theeurozone, while the CzechRepublic hung grimly on toits koruna.
Now, with both countriesemerging from recession,Slovakia is showing mark-edly stronger growth, butotherwise the banking sec-tors in both Slovakia andthe Czech Republic appearto be among the soundest inEurope.
They went into the crisiswith some remarkablestrengths compared withthe rest of the region,namely almost no consumerlending denominated in for-eign currencies, unlikebanks in Poland and espe-cially Hungary.
“The Czech financial sec-tor has no problem with[foreign exchange] expo-sure,” says Vladimir Tom-sik, deputy head of theCzech National Bank, whopoints out Czech interestrates – with the centralbank’s benchmark rate cur-rently at 0.75 per cent –have, for periods of time inrecent years, been belowthose of the eurozone,which means few borrowershave wanted to take therisk of borrowing in a for-eign currency.
A similar calculationexisted in Slovakia, whereborrowers were also awareof the country’s impendingaccession to the eurozone.
“One notable differ-ence . . . to other countriesis the negligible amount ofFX loans. Even before theeuro adoption these loanswere typically granted toenterprises [mainly ineuros]; the majority of loansto households were grantedin domestic currency,” saysJozef Makuch, governorof the National Bank ofSlovakia.
Both banking systems areoverwhelmingly foreignowned, which was an areaof concern during the crisis,when some analystsworried foreign-ownedbanks in central Europewould need such a largeamount of liquidity assist-ance they would end uppulling their west Europeanparents under. InsteadCzech and Slovak banksneeded no outside help.
“The crisis was purelyexternally driven – we hadan unbelievably stablebanking sector,” says PavelKysilka, chief executive ofCeska Sporitelna, the larg-est Czech bank and a unitof Austria’s Erste Bank.
As the crisis has receded,banks are starting to lendagain and profits havereturned.
In 2010, Slovak banks sawtheir profits more than dou-ble to €514m ($724, £446.5m)on the back of gross domes-tic growth of 4 per cent. Inthe Czech Republic, profitsfell slightly to Kcs55.7bn($3.2bn, €2.3bn, £1.9bn),partly harmed by rising loss
provisions and an overalleconomy that grew by only2.3 per cent last year.
Daniel Kollar, chief exec-utive of CSOB Slovakia, asubsidiary of Belgium’sKBC, says: “The worst yearfor sector was 2009 . . . 2010was much better; we couldname it as a year of revival.
“CSOB is carefully watch-ing all segments and isselectively going to sectorswhere the credit risk isacceptable, mainly in hous-ing loans and corporate cli-ents with robust and well-structured balance sheets.”
Both countries’ bankingsectors are also very liquid.Slovakia has a loan-to-de-posit ratio of 81 per cent,while the Czech bankingsystem has a ratio of 74 percent, the best in the Euro-pean Union.
They also have solid capi-tal bases. Slovakia’s tier 1ratio is 12.5 per cent, theCzech Republic’s is nearer14 per cent.
“The recovery of thebanking sector in Slovakiaseems to be, as in general inthe new member states,more pronounced than inother member states,” saysMr Makuch.
As the economies of both-nations revive, some bank-ers are expressing growingconcern about increasinglycutthroat competition forboth deposits and loans.
“We are not happy thatsome of our competitorsseem to have forgotten thatthere was a crisis and havereturned to irresponsiblepractices,” says Jozef
Sikela, the chief executiveof Slovenska Sporitelna,also a subsidiary of Aus-tria’s Erste Bank. He sayshis bank will not lend morethan 90 per cent of a prop-erty’s value.
With mortgage and corpo-rate lending rising, the bigrisk factor for both bankslies abroad: namelywhether Germany’s unex-pectedly strong economicstory can continue. Boththe Czech Republic and Slo-vakia are small and veryopen economies, with indus-try strongly reliant onexports to Germany. Ineffect, both economies havebecome part of the Germansupply chain, and anystumble there would havean immediate impact inPrague and Bratislava.
Despite the strong condi-tion of local banks, the mar-ket appears to be fairly sta-ble, with no ownershipchanges among the largestbanks or new arrivals onthe Slovak or Czech bank-ing scene expected in thenear future.
The long-term outlook isbuoyed by the fact that, 22years after the end of com-munism, both Slovakia andthe Czech Republic are stillunderbanked comparedwith western Europe.Household loans are below40 per cent of GDP in Slova-kia and just above 30 percent in the Czech Republic,far below the almost 70 percent in the EU overall.
“We have decades to con-verge,” says Mr Kysilka,
M&A action is back on corporate radar
Polish banks are doingsomething they have notfor several years: lining upto finance aggressivemerger and acquisitionactivity – a sign of the sec-tor’s increasingly robusthealth.
“M&A deals are one ofthe clear areas of growthpost-crisis,” says MatteoNapolitano of the Econo-mist Intelligence Unit.
Some big deals such asthe upcoming sale ofPolkomtel, one of Poland’sleading mobile operators,for several billion euros,and other transactionsworth at least 1bn zlotyseach are all pulling infinancing offers from five ors i x b a n k s ,says Jacek Chwedoruk,Warsaw managing director
at Rothschild’s, the invest-ment bank.
“That’s hugely differentfrom the situation twoyears ago, and it’s also bet-ter than what we had in2004-2008, before the crisis.”
Polish banks are alsostarting to lend more tobusinesses, especially smalland medium enterprises, asign the recovery is takingdeeper root.
State-owned PKO BP, thecountry’s largest bank,reported a 21 per centincrease in lending to SMEsin the first quarter of thisyear, while lending to largecompanies has not grownnearly as fast.
Similarly, mortgage lend-ing is reviving, driven inpart by a growing percep-tion real estate prices areabout as low as they aregoing to go following aslump that began in mid-2008 and saw prices for bigcity flats fall by more than10 per cent from their peak.
However, driven in partby concerns from the Finan-cial Supervision Authority,the industry regulator,banks are being more cau-
tious about their lending.Customer salary require-
ments and loan-to-valueratios have been tightened,and foreign currency loansare much rarer than theywere during the real estateboom that took off follow-ing Poland’s 2004 joiningthe European Union.
“If foreign currency loansare limited to a small andexperienced group then therisk is limited, but if itbecomes a widespread prod-uct geared toward a massclient then we have a prob-lem,” says Stanislaw Kluza,the authority’s chairman.
The level of foreign cur-rency loans in the overallhousehold loan book hasbeen steadily falling, from69 per cent at the end of2008, to 62 per cent as of theend of February.
Some banks, such asGetin Noble, owned byPolish entrepreneur LeszekCzarnecki, stopped issuingall foreign currency loans –usually denominated inSwiss francs – the momentthe crisis stuck, and havestill not returned to them.
“We were one of the first
to aggressively issue Swissfranc mortgages, but wewere also one of the first tostop them in September2008,” says Mr Czarnecki.
In 2008, 65 per cent of hisbank’s loan book consistedof foreign exchange mort-gages; by the end of thisyear they will fall below athird, he says.
Swiss franc mortgageswere one of the few blots onPolish banks when the cri-
sis hit, otherwise they had afairly good period, helpedby the overall economy –Poland was the only EUcountry not to fall into arecession in 2009 and lastyear the economy expandedby 3.8 per cent, one of thefastest rates in Europe.
Problem loans did rise,but seem to have peaked.
Non-performing loanscame to 7.8 per cent of the
whole sector’s portfolio inMarch, down from 7.9 percent a month earlier,according to the centralbank. All segments wereflat or showing someimprovement.
That has implications forprofits, as banks had setaside provisions to coverdud loans.
Last year net earningsrose by 41 per cent to 11.7bnzlotys, and the country’sbanking regulator expectsprofits to rise at a double-digit tempo this year.Banks reporting for the firstquarter have shown a con-tinued surge in profits.
In spite of solid results,rumours are sweeping themarket about possible banksales.
However, the reason forthe sales is not the condi-tion of Polish banks, butrather the state of their for-eign parents; the nation’sbanks are 72 per cent for-eign owned.
“A lot of the key playersin the Polish market fellinto trouble back home,which is why we are seeingpotential sales on the Polish
market,” says CezaryWisniewski, a partner withLinklaters, the global lawfirm.
The largest such recenttransaction was the sale ofBank Zachodni WBK,Poland’s fifth largest, toSpain’s Santander by AlliedIrish Banks for €4bn.
Other transactionsinclude the €490m purchaseof Polbank by Austria’sRaiffeisen and Getin Bank’s€35m acquisition of AllianzBank Polska.
There are persistentrumours, denied by headoffice, that MillenniumBank, Poland’s seventhlargest and owned by Portu-gal’s Millennium BCP, willcome to market because ofPortugal’s serious economicproblems.
BRE Bank, owned byGermany’s Commerzbank,is also seen as a potentialacquisition target.
“There is interest on thepart of both buyers and sell-ers, and I am certain thatthere will be another suchtransaction in the nearfuture,” says Mr Wis-niewski.
PolandJan Cienski saysoverseas banks areseeking to raisecash by sellingPolish assets
Lenders joinforces to getbigger shareof sector
Since September 2008 Russianbankers and analysts haveforetold of a consolidation of
the banking sector. It seems theymay finally be getting it.
While the Kremlin staved offthe demise of hundreds of banksduring the crisis in an attempt topreserve the stability of the sys-tem, in the years since thenumber of lenders in Russia hasgradually fallen from more than1,000 to about 900. Executives atthe country’s top banks say thefigure will fall even further in thenext five years as smaller banksfail to meet new capital adequacyrequirements, and bigger playerspour money into mergers andacquisitions.
“Consolidation of the bankingsector [in Russia] is inevitableand a good thing. It’s just a ques-tion of how it happens,” says Dim-itri Demekas, assistant director inthe International MonetaryFund’s monetary and capital mar-kets department.
Over the next five years ana-lysts expect to see the gradual dis-appearance of Russia’s so-calledpocket banks, which serve astreasury offices for a single com-pany or businessman.
“The regulator is talking aboutincreasing capital requirementswhich makes it increasinglyexpensive for these smaller banksto operate. The core shareholderswould have to commit more cashto the business,” says SimonNellis, an analyst at Citibank.
What will happen among themedium-sized and big players ismore uncertain, he says.
Leading the consolidation of thesector have been state-ownedlenders Sberbank and VTB.
Sberbank, Russia’s largest bankwith 50 per cent of the country’sdeposits, announced this year itwould move into investmentbanking through acquiring Rus-sia’s oldest brokerage Troika Dia-log, while VTB has cemented itsnumber two-position after buyingTransCreditBank and the Bank ofMoscow.
During the crisis state bankswere the main beneficiaries of thegovernment’s bail-out efforts, andhave maintained their pole posi-tion since, says Vladimir Savov,an analyst at Otkritie, theMoscow investment bank.
“To minimise the damage of thecrisis, the government provided ahuge amount of liquidity to keepthe banking system afloat in theinitial stages and long-term capi-tal to the biggest banks,” he says.
While the measures helped pre-vent hundreds of Russian banksfrom going bust, it has given thestate-controlled banks an advan-tage in terms of capital and theconsolidation process.
“The big players [in the sector]are in an even stronger positionthan they were a few years ago.They’ve come out of the crisis inbetter shape than many competi-tors,” says Michael Bott, head ofbanking at Linklaters in Moscow.
For Mr Bott, the most visiblechange has been in corporaterestructurings where westernbanks have largely given way tostate banks as the underwriters oflarge billion-dollar-plus deals.
“What we saw during some ofthe big restructurings was thestate banks . . . stepping into theshoes previously occupied by the
western banks [and doing big cor-porate debt restructurings] . . .You now see the likes of VTB andSberbank underwriting big tick-ets,” he says.
Mr Nellis says Sberbank andVTB have also started lending to
small and medium Russian enter-prises as that sphere tends to bedominated by higher returns thanlending to larger corporates.
“Sberbank has started to bemuch more active in trying to tar-get these higher-margin, lower-
ticket segments,” Mr Nellis says.“Banks’ margins have been
under a lot of pressure as interestrates have come down and the bigbanks are getting more aggressivein niche areas. The competitiveenvironment is heating up.”
Nonetheless, he believes thereis still a place in the system forlarge, privately owned Russianbanks, many of which are compet-ing with the state lenders as plat-forms for consolidation.
Nomos Bank, Russia’s eighthlargest lender by assets, raisedmore than $700m (€495m, £432m)in a London initial public offeringthis year and plans to use thecapital to fund acquisitions.
Meanwhile Uralsib, another pri-vate lender, is considering team-ing up with a foreign bankin Moscow to solidify its position.
One executive at a private Rus-sian banks says privately owned
lenders may even have an advan-tage over state banks in the com-ing months. Sberbank already has50 per cent of the market and can-not expand much further, heargues, while VTB will need timeto digest and integrate its twoacquisitions.
“VTB is like a snake that hasswallowed two rabbits,” the exec-utive jokes.
Mr Demekas argues the statemust try to help private lendersincrease their share of Russiandeposits as they were successfullydoing before the crisis. “The factthat the system is dominated bybig banks that are too big to failcreates moral hazard,” he says.
But levelling the playing fieldwill not be easy. “There is nosilver bullet to help the govern-ment increase competition in the[banking] sector or any othersector of the economy,” he adds.
Russian consolidationState banks gained fromthe crisis but privatelenders still have a role,says Courtney Weaver
VTB has cemented its number two position after buying TransCreditBank and the Bank of Moscow Bloomberg
‘Consolidation of thebanking sector isinevitable and a goodthing. It’s just a questionof how it happens’
RecoveryLow FX exposureshielded the sectorfrom the recession,writes Jan Cienski
Private equityJan Cienski andChris Bryant lookat the prospects forthe region’s debtfinancing groups
‘What is needed isexperienced, reallyentrepreneurial,people who want tobuy, build anddevelop companies’
VladimirTomsik:Czech ratesof interestwere beloweurozone’s
PKO sayslending toSMEs rose21 per cent inthe firstquarter
FINANCIAL TIMES FRIDAY MAY 20 2011 ★ 3
Central & Eastern Europe: Banking & Finance
Pensions changes now a big political issue
The accounting conse-quences of second-pillarpension reforms wouldseem to be a snooze-
inducing subject, but acrosscentral Europe it has become aleading political issue, shakingthe popularity of prime minis-ters and provoking questionsabout the fiscal credibility ofgovernments.
Hungary took the most radi-cal step – essentially nationalis-ing its second-pillar or supple-mentary (often funding-based)occupational pension system –while Poland permanentlyreduced payments.
Others such as the Baltic trio
temporarily reduced the amountof money flowing into the pri-vately managed funds andRomania shelved plans toexpand the system. However,Slovakia has continued its fund-ing as before while the CzechRepublic’s centre-right govern-ment is creating a reformed pen-sion system despite controversysurrounding the idea.
The political consequenceswere most apparent in Poland,where the government’s deci-sion to reduce contributions tothe second pillar of the pensionsystem from 7.3 per cent ofworkers’ salaries to 2.3 per cent(rising eventually to 3.5 percent), set off a wave of outragefrom prominent economists, ledby Leszek Balcerowicz, a formerfinance minister and architectof Poland’s post-communist eco-nomic transformation.
The government forged ahead,but at the cost of shredding thepro-reformist credentials of Don-ald Tusk, the prime minister.
Nicholas Spiro of Spiro Strat-egy says: “The changes them-selves, relative to those imple-mented in Hungary, are fairlybenign. They are a backwardstep in the sense that theyspeak volumes about the con-duct of Polish fiscal policy bysuccessive governments which,like many of their Europeancounterparts, have gone for one-off measures, or creativeaccounting, to shore up publicfinances.”
The fuss is a far cry from thereformist optimism that pre-vailed at the turn of the cen-tury, when eight central Euro-pean countries embarked onpension reforms encouraged byinternational financial institu-tions and pressed by their ownworsening demographics, whichshowed that existing pensionsystems were unsustainable dueto falling birth rates andincreases in life expectancy.
All the countries set up varia-tions on a model, building a new
private, and usually mandatory,second-pillar defined contribu-tion pension system that runsparallel to the existing pay-as-you-go system.
The idea was that the reformswould improve long-run fiscalsustainability, diversify risk andprovide other benefits such asthe creation of deeper localcapital markets.
In the case of Poland, thosebenefits have become apparent,with pension funds providing ahuge boost to the Warsaw StockExchange, which has grown tobecome the region’s leadingbourse.
But the costs of reform havealso been unexpectedly large.
For Poland, the expected tran-sition costs of maintaining theexisting pension system whilediverting money to a newscheme was originally estimatedat less than 1 per cent of grossdomestic product a year overless than a decade, an amountthat was to have been largelycovered by the proceeds fromthe sales of state assets. Now,however, the government esti-mates that the true cost ofreforms will amount to 95 percent of a year’s GDP by 2060.
However, subsequent govern-ments gobbled up privatisationproceeds, while powerful groupssuch as uniformed services andminers were allowed to escapefrom the state pension system,and farmers were permitted tostay in a separate scheme.
Funding the second pillarended up being entirelyfinanced by borrowing – the sec-ond pillar accounts for about a
third of Poland’s debt, now 54per cent of GDP. In effect, thegovernment issues debt to fundthe system, and private pensionfunds then take about 70 percent of the funds they receiveand use it to buy governmentbonds – a circular transactionthat Jacek Rostowski, the Polishfinance minister, dubbed a“cancer” which, he says, “hasgrown to gigantic proportionsand is destroying the wholepension system”.
An additional complication isthat the EU has failed to adaptthe Growth and Stability Pact toaccount for pension reforms. Ineffect, countries with reformedsystems find it harder to complybecause assets accumulated inprivate pension funds are notcounted as part of governmentaccounts.
The result is that countriesthat have reformed and have fis-cal situations that are more sta-ble over the long term are hurt.
The tensions inherent in a
reformed pension system cameto a head during the economiccrisis, when the central andeastern European region saw asignificant deterioration in pub-lic finances.
The rightwing Hungarian gov-ernment took the most radicalsteps: “The government desper-ately needed money to stabilisethe country’s finances, and theonly place they would turn towas the private pension system,where there was more than€12bn – a huge amount ofmoney,” says Krisztian Szaba-dos at the Political Capitalthink-tank in Budapest.
Despite questions over thelegality of the move, Hungaryhas not been punished by inter-national financial markets.
Mr Tusk also seems to havesurvived the political turmoilthat surrounded his decision toreduce payments into the sec-ond pillar, with his Civic Plat-form party retaining its spot atthe top of the opinion polls.
RetirementNations take differentapproaches to handlingthe cost of old age,writes Jan Cienski
Fired up: a Solidarity trade unionist throws a firecracker during a demonstration against reforms to the pension system Getty
The fuss is a far cryfrom the reformistoptimism thatprevailed at the turnof the century
Bailiffs earn a good livingfrom those who cannot pay
The economic crisis left alot of losers in its wake, butalso winners such as PiotrKrupa, the founder of Kruk,the largest debt collectionand securitisation agency inPoland, with fast-growingregional ambitions.
“We ended up with a lotmore cases thanks to thecrisis,” said a grinning MrKrupa, speaking on thefloor of the Warsaw StockExchange earlier this
month as he celebrated hiscompany’s initial publicoffering.
Mr Krupa’s company, likethe other mostly local busi-nesses working in the debtcollection market, have con-centrated on consumerloans, where 18 per cent ofall outstanding loans are introuble.
That compares with annon-performing loan (NPL)rate of 6.6 per cent at theend of 2008, according toPoland’s Financial Supervi-sion Authority, the bankingsector regulator.
By contrast, the ratio oftroubled mortgage loans isbelow 2 per cent, a sign ofthe reluctance on the partof Poles to lose their homes.Banks are dealing withthose NPLs in-house.
But banks are muchkeener to sell off bad con-sumer loans where theaverage amount owed isjust over €1,000 ($1,430,£880) and debt collectionagencies have become spe-cialists in pricing risk.
Currently, such debt port-folios average at about 16per cent of face value, andcollection agencies aim fora return of at least 2.5 timeswhat they paid, says MrKrupa.
This year, the industry isexpected to buy about 9.2bnzlotys ($3.3bn, €2.3bn, £2bn)in troubled debt frombanks, up from 4.5bn zlotysin 2010, according to Kruk.
“Debt collection agenciesare having a good periodright now as banks arekeener to sell,” says Krzysz-tof Matela, chief executiveof EGB Investments,another Polish debt agency.
Mr Krupa says the key tohis company’s fast growthwas taking a more under-standing approach towardspeople who were not repay-ing their debts, workingwith them rather than pun-ishing them.
“The trick is how to builda business with honest peo-ple who have no money,”he says. “You have to becareful, because if you pressPoles too hard they willrebel. But a more respectfultone changes the dynamic.”
Mr Krupa says thatapproach has worked in
Romania, where Kruk hasquickly become the largestdebt collection company,and he hopes it will be thesame in the Czech Republicand Slovakia, markets thecompany hopes to entersoon.
So far, there is not a lot ofinternational competition inthe region, with many for-eign debt collection agen-cies concentrating on morelucrative work closer tohome in markets theyunderstand better.
“The Polish companiesgrew up so fast that there isvery little room for outsid-ers,” says Mr Matela, notingany new entrants wouldprobably have to buy anexisting company rather
than trying to penetrate themarket through organicgrowth.
Rising levels of bad debtare a concern across theregion, where only Polandmanaged to avoid a reces-sion in 2009.
Almost all of the coun-tries had experienced lend-ing booms just before thecrisis and, with risingunemployment and slowinggrowth, the number of trou-bled loans has jumped.
As debts have grown, gov-ernments are becominginvolved, which could makelife difficult for collectionagencies.
In May Serbia adopted alaw to protect borrowers inthe downturn.
The legislation, to takeeffect next year, will pre-vent banks and other finan-cial service providers fromraising interest rates unilat-erally, including on old
loans, whether to compa-nies or individuals, says thecentral bank governor,Dejan Soskic, who proposedthe bill.
The same applies to hous-ing loans – the fastest-grow-ing source of bad debtamong Serbia’s roughly7.5m citizens.
While the central bankhas concentrated on preven-tion, the government haspushed banks to keep refi-nancing loans that havestarted going bad.
Bankers, although waryof state interference, cau-tiously welcomed the guide-lines.
“The country needs this,particularly for corporates,”says Slavko Caric, chiefexecutive at Erste Bank inSerbia.
Lenders prefer to helpstruggling borrowers ratherthan foreclose, since a via-ble client brings more profitthan a glut of seized assets.
But good banks need toensure that a firm’s capitaloutweighs its debt; that ithas a sustainable businessplan; and that the manage-ment is alert to changingeconomic circumstances,Mr Caric adds.
Many Serbian companiesalready received refinanc-ing based on those consider-ations in 2009, when globaland European economicshocks first reverberated inthe largest ex-Yugoslavrepublic.
Unfortunately, the sameloans are now coming upfor repayment again, with-out the economy havingbounced back.
Serbia’s courts havebecome efficient in han-dling foreclosures, lawyerssay.
In neighbouring Bosnia,however, cases againstdebtors still drag on.
Creditors to Pevec, abankrupt Croatian retailchain, have waited for morethan a year for court clear-ance for a property sell-offin the Serb-run part of thecountry, says Sead Miljko-vic, a lawyer for Wolf The-iss in Sarajevo.
“Banks face serious prob-lems in court against debt-ors all over Bosnia,” hesays.
Bad debtsThe pursuit ofloan defaulters hasbecome bigbusiness, reportJan Cienski andNeil MacDonald
ContributorsNeil BuckleyCentral and EasternEurope Editor
Chris BryantCentral and EasternEurope BusinessCorrespondent
Jan CienskiWarsaw Bureau Chief
Courtney WeaverMoscow Reporter
Neil MacDonaldBelgrade Correspondent
Spencer JakabLex Writer
Tom GriggsCommissioning Editor
Steven BirdDesigner
Andy MearsPicture Editor
For advertising, contact:Samantha Lhoas on:+44 (020) 7873 3408;email:[email protected] your usualrepresentative
All FT reports are availableon FT.com atwww.ft.com/reports
‘You have to becareful, because ifyou press Poles toohard they will rebel’
Piotr Krupa,Kruk founder
4 ★ FINANCIAL TIMES FRIDAY MAY 20 2011
Central & Eastern Europe: Banking & Finance
Numberof PPPschemesset to rise
Driving in Romania can be atrying experience: with littlemore than 300km of motor-ways, gridlock in the capi-
tal, Bucharest, and minor roads thatare riddled with potholes, the coun-try’s 21m inhabitants struggle to getanywhere in a hurry.
Cross the border into Hungary,however, and a road trip generallybecomes more enjoyable thanks to ageneration of successful highway con-struction, some of it financed by theprivate sector.
In coming years the entire regionwill require tens of billions of euros ofsimilar investments to upgrade creak-ing communist-era infrastructure,including transport, water, waste, hos-pitals and energy (particularly therenewables sector).
But the financial crisis and subse-quent need for fiscal consolidationhave left governments constrained intheir ability to pay for these projects.Policymakers, banks and constructioncompanies are therefore rethinkinghow 21st-century infrastructure willbe financed.
European Union structural andcohesion funds – a €170bn ($240bn) potof development money designated tohelp eastern European countriescatch up with the richer west – willcontinue to be a key source of infra-structure financing for the region.
Poland has proved particularlyadept at absorbing these funds andtoday the country resembles a hugebuilding site as it revamps its ageingroad network in preparation for the2012 European football champion-ships.
However, EU funds will not beenough to fill the entire gap as theyare not suited for all projects and areunavailable to non-member states.Here the European Investment Bank(EIB) and European Bank for Recon-struction and Development play acrucial role.
Public-private partnerships, bywhich governments and the privatesector share risk to pay for, constructand operate infrastructure, maybecome increasingly common as thesecan help minimise damage to govern-ment balance sheets.
In spite of exceptions such asPoland and Hungary, however, PPP isonly now becoming widespread incentral and eastern Europe.
This is partly explained by the
crowding out effect of “free” EU fund-ing but experts say it also reflects alack of institutional understanding ofthese complex projects in some coun-tries, which they are now rushing toimprove.
“The financial crisis perhaps madea number of CEE governments realisethat they had no choice but to look atall sources for financing infrastruc-ture,” says Nick Allen, partnerresponsible for eastern European
infrastructure finance at PwC. “Thosewho were averse to PPP due to itscomplexity or on ideological groundsrealised that at the end of the day it’sjust another source of finance.”
The crisis, however, has made fund-ing more costly and it is more difficultto get very large projects off theground. “Previously, a normal PPPproject could be financed with – let’ssay – five different banks,” says DianaNeumueller-Klein at Austrian con-
struction group Strabag. “During thecrisis, the financing institutionsstarted to diversify their risk, iefinancing smaller stakes of a project.As a result, many more banks wereneeded in order to finance a project.”
“The size of the project matters,”says Matthias Kollatz-Ahnen, EIBvice-president. “It’s easier to createcompetition for a highway construc-tion if the project is worth €500mrather than say €1.5bn. So slicing up
projects makes sense, even if thatmight mean more work.”
Still, industry participants note thatfinancing for several PPP projects wassecured even at the height of thecrisis, including a €520m stretch ofHungary’s M6 motorway.
Although private partners are nowrequired to put up more equity, banksremain willing to finance projects solong as the legislative and regulatoryframework is amenable and projectsare well designed.
“The challenge is to find projectsthat are well-structured and risk hasbeen properly allocated . . . And toimplement an infrastructure pro-gramme you need strong politicalcommitment as well as political stabil-ity,” says Massimo Pecorari, co-headof Project and Commodity Finance atUniCredit.
A decision last September by Slova-kia’s new government to abandon aproposed €3.3bn PPP project for thefirst stretch of the D1 motorwayunderscored the political risks ofdoing business in the region.
Meanwhile, in neighbouring Hun-gary, Viktor Orban, the prime minis-ter, has vowed to suspend or renegoti-ate PPP projects not yet started.
“The issue is when should you starta big infrastructure project,” saysWerner Weihs-Raabl, head of infra-structure finance at Erste Group. “Ifit’s half a year before the next elec-tion, then don’t touch it, but if it’s inmidterm then it makes sense.”
Due to past problems, constructiongroups are these days unwilling toshare the risk of whether a projectwill generate sufficient revenues (forexample a toll road). Rather, thestandard in eastern Europe hasbecome the so-called “availabilitymodel”, whereby private partnersbear the construction and deliveryrisks and must meet certain perform-ance criteria.
Other areas of innovation includethe possibility of combining PPP withEU funds to finance infrastructure, amodel still relatively untested region-ally. Meanwhile, the European Com-mission in February opened the doorfor project companies to tap capitalmarkets when it launched a “projectbond initiative” in conjunction withthe EIB.
InfrastructureChris Bryant looks at howstates can pay for projectswithin their limits
Tunnelling ahead: the financing of several projects was secured at the height of the crisis, including a €520m stretch of Hungary’s M6 motorway
Eurobonds Balkan countries enter the marketThe global economic crisis may have hit southeastEurope late, but it has been slow to lift. Even so,the current woes of the eurozone have broughtopportunities, and states are now making foraysinto international capital markets.
Serbia, for example, is preparing its firstsovereign Eurobond, expected to be worth up to$1bn. The bond, likely to be denominated in USdollars, could be launched in the autumn, thecountry’s debt management agency says.
Analysts say tapping global financial capital islong overdue. Eurobonds – those sold outside thecountry of the currency in which it is denominated– provide a valuable benchmark for institutionalinvestors seeking to enter an otherwise obscureemerging market.
Serbia tested the waters with domesticofferings open to foreign investors. A 370daytreasury bond launched on February 9 for €200mwas five times subscribed, with half the demandfrom nonresidents, says Bojan Markovic, deputygovernor of Serbia’s central bank. Nonresidentdemand was similarly high for an 18month dinarbond.
“These were Serbia’s first sizeable debt issues ofthis kind and went well,” Mr Markovic says. “Thechance of liquidity in the secondary market isbigger if the issue is larger.”
The planned Eurobond will also establish clearyield curves for paper from Serbia’s biggestprivatesector companies, which have facedmounting bank debt since 2009.
Delta Holding, Serbia’s biggestcompany, sold its regional supermarketoperations to Belgium’s Delhaize partly toshed debt; East Point, a Serbruncompany with regional metals andbakery businesses, handed itself to UKbased fund managers in return for a capitalincrease.
Since the 1990s, Serbia has fallenbehind its neighbours in terms ofaccess to global finance.
Serbia and Montenegroissued a joint Eurobond in2004, during their fleeting“state union” after the rest of
Yugoslavia had broken up. Montenegro, whoseleaders said Serbia was holding back the smallerrepublic’s economic growth, opted out of theunion peacefully five years ago. It has launchedtwo eurobonds: one for €200m in September2010, and another for €180m in April 2011.
Igor Luksic, prime minister, pressed aheaddespite warnings of failure. Albania also launchedits first Eurobond, worth €300m, in late 2010.
These Balkan issues, although lacking sufficientliquidity to matter to big investors, “succeededbecause of the diversification they can provide,”says Martin Weber, a managing director head ofSSA syndicate at Goldman Sachs.
The global crisis initially put investors offemerging markets, but the western Balkansremained relatively unexposed to shocks. “Now,institutional investors are looking for sovereigntypecredit, but with some diversification fromestablished European markets,” Mr Weber says.“So the socalled ‘troubles’ in the eurozone areproviding the southeastern European bond marketwith a bit of an opportunity.”
Greece’s debt problems, although harmful toforeign direct investment, have left bonds fromelsewhere in the region unscathed.
The states of the former Yugoslavia range fromSlovenia, a comparatively industrialised EU andeurozone member with eurobonds since 1996, toKosovo, dependent on international aid and lacking
any stock or bond market. In general, emergingmarkets receive lower sovereign risk ratings
than their economic fundamentals wouldwarrant. Serbia’s 40 per cent debt to GDPratio should give it higher ratings thanSpain or Ireland, says Sir Paul Judge,chairman of Greenhouse Investments, a
UKbased fund with telecom and bankingbusinesses in the Balkans.
States and companies alike, however,need to put themselves out
there to capture anyavailable funds. “Explosivegrowth in ‘emerging
markets’ investment fundsis at odds with [small]issue sizes in markets likeSerbia,” Mr Judge says.
Neil MacDonaldIgor Luksic, Montenegrinpresident Getty
Domestic financing canease foreign currency woes
Much ink has been spilt inrecent months on why Polandwas the only member of theEuropean Union not to fall intorecession during the crisis.
Strong domestic demand, awell-capitalised banking system,a flexible currency and low pri-vate debt were all essential. Oneof the less rehearsed arguments,however, is that the strength ofits local currency capital marketprovided a much-needed sourceof stability.
The severe problems causedin parts of emerging Europe byrampant pre-crisis lending inforeign currency has spurredworries about the region’s reli-ance on cross-border finance.This has helped focus minds onhow these economies can buildtheir own local currency finan-cial markets – or become a bitmore like Poland.
After the fall of the Iron Cur-tain, countries hurried to estab-lish stock exchanges, which formany became a source of prideas well as equity finance. Butwhile Warsaw, Moscow, Istan-bul have emerged as regionalhubs, elsewhere sophisticated,liquid markets have generallyfailed to develop. Indeed, localcurrency loans and deposits
exceed 60 per cent of the total inonly four countries in the region– Czech Republic, Poland, Rus-sia and Turkey – according tothe European Bank for Recon-struction and Development.
Corporate bond issuancetends to be weak or non-existentacross the region, in partbecause smaller markets lack aninstitutional investor base.Instead, government issuance ofsecurities – often in euros ordollars – predominates.
Domestic savings used to beviewed as insufficient to buildlocal currency markets andimporting foreign-denominatedfunds seemed both cheaper andeasier. Moreover, many coun-tries wanted to join the euro-zone quickly, removing theurgency to build a strong localmarket.
Simon Quijano-Evans, econo-mist at ING says: “The sover-eign was not issuing localbonds, because it was moreexpensive than to issue bondsdenominated in euros or poundsor dollars, and because thebudgets were actually lookingpretty good.”
At its annual meeting lastyear the EBRD launched an ini-tiative to tackle foreign cur-rency lending and foster thedevelopment of local currencyfinance. It argues that harness-ing domestic sources of financ-ing will boost growth andreduce the vulnerabilitiescaused by relying on foreigncurrency inflows.
Policymakers acknowledgethis will not happen overnight
and will require a country-by-country approach. Still, thetroubles in the periphery of theeurozone suggest expansion willbe slower than before, givingcountries time to focus on devel-oping domestic markets.
Controlling inflation andother macroeconomic funda-mentals are viewed as essentialto building a local market. “Inthe early stages of development,all the focus should be on get-ting the macro frameworkright,” says Erik Berglof, EBRDchief economist. “When peoplecannot predict inflation withinmaybe plus or minus 5 per cent,that is a very significant riskthat makes it very difficult toget local currency fundinggoing.”
Numerous technical chal-lenges lie ahead, not least theneed to reform local legal frame-works and establish short-termpricing instruments.
“It’s extremely important thaton the short end, capital marketinstruments prevail as we, as acommercial bank, need parame-ters against which we can lend,”says Herbert Stepic, chief execu-tive of Raiffeisen Bank Interna-tional. “Only if we have parame-ters of short-term markets,treasury bills and treasurybonds, are we able to build ourpricing for domestic currency.”
But analysts view recent stepsby Hungary and Poland to par-tially reverse pension reformsas a step in the wrong direction:“They are scaling down thesesystems for budgetary reasonswhich is unfortunate for further
pensions and capital marketdevelopment . . . Having a strongpension and insurance industryis vital to attract liquidity,” saysMarcus Svedberg, chief econo-mist at East Capital.
The EBRD acknowledges thatblanket bans on foreign cur-rency lending will not on theirown encourage a domestic cur-rency market and could provecounter-productive by hamper-ing credit growth. Meanwhile,interest rate differentials con-tinue to favour foreign currencyloans in most markets, meaningconsumers may take some per-suading to change their habits.
Cash-strapped governmentsare also likely to take some con-vincing it is worth payinghigher yields to issue debt indomestic currency. Moreover,some markets – such as Georgiaor Armenia – may simply be toosmall to obtain critical mass.
“Over the long term to haveliquid stock markets you needto think beyond [national mar-kets] . . . It is happening also incentral Europe, Warsaw isdeveloping fast, Istanbul is alsoexpanding to take a regionalrole and even challengingVienna. So there is a competi-tion on regional platforms inequities, and I think we aregoing to see the same thing onthe bonds side,” Mr Berglofsays.
Capital marketsChris Bryant andNeil Buckley look atthe importance of alocal source of funding
Risks of Swiss franc loans loom large over Hungary
Though few fully appreci-ated the risks, the middle ofthe last decade saw retailborrowers in central andeastern Europe embrace afavourite technique ofsophisticated investors –the so-called “carry trade”.
This involves borrowingmoney in a low-yieldingcurrency in order to pur-chase an asset in a cur-rency that is likely to pro-vide a higher return.
For homebuyers thisseemed like a doubly good
bet, as the prospect ofentering the eurozonesparked a residential prop-erty boom and strengthenedlocal currencies.
But the financial crisisturned this benign calculusupside down, sending thevalue of foreign currencyloans expressed in zloty,forints, koruna or lei soar-ing, even as the value ofcollateral went into reverse.
Istvan Rácz, chief econo-mist for Hungary’s Finan-cial Supervisory Authority,says: “About 70 per cent ofall loans extended by banksand non-banks are denomi-nated in currencies otherthan the forint and 95 percent of that is in Swissfrancs.” He adds with sar-donic understatement thatthis is “a little bit of a prob-lem these days.”
The Hungarian National
Bank estimates that nineout of 10 foreign currencymortgages were made whena Swiss franc fetchedbetween 145 and 175 forints,compared with 209 today.The outstanding stock ofSwiss franc loans is nearlya fifth of gross domesticproduct.
An outright catastrophewas averted when a Euro-pean Union-InternationalMonetary Fund packagestabilised Hungary’sfinances in late 2008 but,even so, the ratio of non-performing loans has risento about 8.5 per cent.
The same forex loan feverswept much of the region,but the resulting strain onbanks and borrowers hasbeen less severe elsewhere.
“You can’t put all thecountries in the same bas-ket,” says Andrzej Nowac-
zek, central and easternEuropean banks analyst atING. “It’s a big problem inHungary, not such a bigproblem in Poland, and theCzech Republic is totallyOK.”
Whereas Czech banks didplenty of foreign currencylending, much of it was tocompanies that had exportsales. And while both Hun-garian and Polish bankssaw a boom in mortgagelending, the latter offeredloans with a fixed spreadover short-term interestrates. Loose monetarypolicy in western Europehas blunted the impact forborrowers.
“Even with the increasein exchange rates, themonthly payment is lowerin zloty,” says RemigiuszFalkowski, who heads mort-gage lending for Poland’s
Bank Pekao, which cur-tailed foreign currencymortgages in 2003, wellbefore most competitors.
Delinquencies are thusfar lower in Poland than inHungary. Nevertheless,since Polish banks do nothave the luxury of fundingthemselves in francs, mar-gins have come under pres-sure.
Profits took a further hitafter regulators crackeddown on excessive forexbrokerage fees. Once short-term interest rates in devel-oped countries normalise,Polish mortgages couldbecome pricier, especially ifthe zloty fails to appreciate.
“You never know whichof these factors will change.If [interest rates rise and]exchange rates stay thesame, then it can be quitehard for borrowers,” says
Mr Falkowski.Notwithstanding such
scenarios, Mr Nowaczekbelieves that Polish bankshave turned the corner interms of profitability whileHungarian ones may notsee a full recovery until
2013. In Hungary, OTP, thelargest bank, earned morethan twice the net interestmargin that Pekao did lastyear, but it booked provi-sions at four times the pro-portion of its operatingprofit, resulting in a lower
return on equity.Mr Nowaczek believes
that a moratorium on fore-closures, originally slated toend in April and extendedthrough June, is maskingproblems. “The issue is notgoing to go away in Hun-gary. You’ve had instancesof banks restructuringloans more than once. Ithink those loans will haveto be reclassified as non-performing,” he says.
About 120,000 debtors –out of 4m Hungarian house-holds – are seriously delin-quent. More than twice thatnumber are behind on theirutility bills. That suggestsboth that the strains areworse than banks indicateand that they impact thehousing sector directly, asproviders are in theory enti-tled to go after personalassets if unpaid.
Mr Rácz says the Hungar-ian government is negotiat-ing a grand solution withbanks to avoid a wave offoreclosures and help thoseborrowers who are not yetdelinquent.
“The outlines of the dealinvolve huge restructuringof loans by banks,” he says,noting that, while Hungari-ans’ debt ratio is not partic-ularly high at 70 per cent ofpersonal income, debt serv-ice ratios are.
Options being discussedhave ranged from offeringcheap public housing forthose facing eviction toassuming part or all of theforeign exchange risk onbehalf of borrowers.
Mr Rácz says many ofthese ideas have shortcom-ings: “Some solutions areinappropriate and some aretoo expensive,” he says.
Foreign currencylendingSpencer Jakab saysbad loans mayrequire largescalerestructuring
Warsaw Stock Exchange
About 120,000debtors – out of4m Hungarianhouseholds – areseriously delinquent