Austrian Banks The Most Exposed To Eastern Europe Forex Lending

Bloomberg are reporting (via Der Standard) that Austrian banks have the biggest exposure to Forex lending in Eastern Europe. This is hardly breaking news, and I have had working notes for a post on this lying around for months (here, please excuse the mess, I will append some of this to this post if time permits at the weekend). The issue is simply finding the time to do everything. Basically I would say that all this business about not devaluing currencies (and hence imposing wage cuts) in Eastern Europe is to do with this issue (also highly exposed are the Swedish banks, and Italy’s Unicredit). Der Standard cite an as yet unpublished International Monetary Fund report to the effect that Austrian banks have loans outstanding in Eastern Europe equal to about 70 percent of the country’s gross domestic product, a higher percentage exposure than any other country.

If you are in the business of liking scary quotes, you could try this one (which comes from the king of scary quotes and dreaded anthropologist’s grandson – Ambrose Evans Pritchard – but that doesn’t make it any less scary:

“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon. Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.

The more sobre version would be this one from Paul Krugman that I keep using:

“There is a burgeoning economic crisis in the European periphery,” Krugman said on the ABC network Dec. 14. “The money has dried up. That’s the new center, the center of this crisis has moved from the U.S. housing market to the European periphery.”

Either way, the economic meltdown in parts of Europe’s Eastern and Southern periphery is now in the process of working its way back up the pipes and to the core, to Germany in terms of the collapse in GDP growth and exports, and to Austria in terms of stress on the banking system.

Germany’s economy may have contracted the most in more than two decades in the final quarter of 2008 as the global financial crisis hurt exports and damped spending, the Federal Statistics Office said. The economy probably shrank between 1.5 percent and 2 percent in the fourth quarter from the third, Norbert Raeth, an economist at the statistics office, said at a press conference in Frankfurt today. A 2 percent drop would be the worst quarterly contraction since German reunification in 1990 and the most for West Germany since the first quarter of 1987.

And while I am here, Izabella Kaminska has a timely piece on forex lending exposure in Poland over FT Alphaville. The situation in Poland is important, since the country is widely regarded as the strongest and least vulnerable of the EU10 economies (see Christoph Rosenberg, for example). So basically, I would say that rather than being just one more “meltdown” in Eastern Europe, if Poland crumbles this will be the last domino to fall, bringing all the rest down in its train – craaaash (I wrote a longish piece on Poland back in October, here). The Leu and the Forint will need to correct to levels which bring back export competitiveness, and behind them will come the pegs in the Baltics and Bulgaria, bring with them all the west european banks who funded the lending.

This entry was posted in A Fistful Of Euros, Economics and demography by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

11 thoughts on “Austrian Banks The Most Exposed To Eastern Europe Forex Lending

  1. So far the Austrian foreign currency exposure has been a great revenue source for the country and its banks. There is more credit needed in Central and Eastern Europe than in Western Europe because growth is higher and capital is more scarce. Most of the exchange rate risk has been put on the CEE customers and not borne by the Austrian banks. This is a very natural phenomenon and I do not think that anybody should have done anything to prevent it.

    But all in all I think it is a very unwise strategy from the EU that it does not make different entry criteria for transition economies and new member states for the adoption of the euro. If these countries could join the euro zone, the whole forex problem would disappear. (Most of the foreign exchange loans are incredibly denominated in euros, because European banks have access to euros and CEE companies get paid for their work in euros anyway).

    The case for not letting these countries in the euro zone had bee that they might mess up the fundamentals behind the euro. But they are too small to do so, and in the case of financial disruption it may be more expensive for euro-zone countries to let these countries out of the euro zone. After all, these countries are as much integrated into the eurozone real economies as Austria is.

  2. Hello Daniel,

    I understand what you are saying, but the problem is that before entering the eurozone they need to recover export competiveness, otherwise they will just end up, at best, as more Portugals, with unsustainable health and pension systems since the stagnation will not offer them the growth they need to pay the elderly dependence.

    So either you have a sharp devaluation of the forint, or you have several years of difficult wage and price cuts. Dominique Strauss Kahn was in Budapest only this week to stiffen the resolve of your government on this latter approach which is what they signed up for when they took the loan.

    But from the point of view of the foreign banks there is no difference, the defaults will come, and the home countries (in this case Austria) will need to have the bank bailouts (up to 70% of GDP in this case) ready.

    As Paul Krugman made clear I think, whether or not to devalue or to cut wages and prices is a domestic issue, but the end result for the external banks is the same, with the only difference that in the case of deflation even HUF denominated loans are affected:

    As Hugh points out, the proposed alternative — sharp wage cuts, and basically a major domestic deflation — will also make it hard to service those debts. In fact, I’d be a bit more specific than Hugh: other things equal, a nominal devaluation and a real depreciation achieved through deflation should have exactly the same effect on debt service (unless some of the debt is in lats rather than euros, in which case devaluation would do less damage.)

    Fortunately in the Hungary case the percentage of non CHF recent mortgages (where most of the distress will come, you have to think about the unemployment as well as the simple wage deflation) is very small indeed, so the difference isn’t important here.

  3. Daniel,

    I also think there is a lack of realism in Eastern Europe right now, about:

    a) how serious the economic recession is right across the EU12 economies

    b) how hard pressed the eurozone itself is right now. The number one priority is going to have to be avoiding Greece – who just had a downgrade from S&P – rocketed out at one end, and I seriously doubt they are going to be in any position to consider new applications from the East for some considerable time.

    I think it is very unfair that they aren’t making this plain to you all. Apart from Greece, there are serious issues in Italy, Spain, Portugal, Ireland and now Greece. I mean, think about it for a minute. There are just not the resources to put all the fires out.

    That is why, in my opinion, Hungary and Latvia were sent over to the IMF field hospital, the EU one is already running short of beds.

  4. Actually Hungary is not in the eurozone and got probably the biggest financial assistance from the EU anyway. This is a stupid policy as it encourages free-riding. This is a loose-loose situation. I am also very concerned about the situation in Greece. The reason why it will cost less in direct funds for the EU than Hungary is because they are within the eurozone.

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