Fresh doubt cast on local currency plan

14/05/2010 | Simon Pirani

The head of Erste Group, the central European banking giant, has questioned the logic of developing local currency markets in countries that aspire to join monetary union

The head of Erste Group, the central European banking giant, has questioned the logic of developing local currency markets in countries that aspire to join monetary union.

“Does it make sense now to develop a forint market, when five years down the line Hungary might join the euro?” Andreas Treichl, chairman and CEO of Erste, asked at a seminar in Zagreb.

“Maybe those countries that are not in the euro [but are on course to join] should not even attempt to form a local currency market.”

His remarks cut across the EBRD’s initiative to boost local currency markets, to be launched in Zagreb on Saturday.

Treichl said euro lending – but not lending in Swiss francs or yen, for example – was “not bad per se, but needs to be better regulated” in the region.

Treichl told the gathering that, when discussing loan-deposit ratios, it was crucial to distinguish between forex lending and local lending. Hungary’s ratio for local lending was reasonable, at around 100%, but when forex loans were included, it was a cause for concern, he said.

He added that there was a danger not only of ratios being too high, but also of them being too low, because then “what do you do with the excess funding? You buy nonsense paper.”

The theme of regulation was taken up by Julia Kiraly, deputy governor of the National Bank of Hungary, who said that she wished that the stringent restrictions imposed on foreign exchange lending by Austrian regulators would be extended to Austrian banks’ subsidiaries in eastern Europe.

Herbert Stepic, CEO of Raiffeisen International, told the seminar that improved regulation was a prerequisite for forex lending. If his bank declined a six-month dollar loan to an individual customer who wanted to buy a fridge, “and then the regulator allows a competitor, because it is classed as a consumer finance entity, to do so, then we have no chance”.

The criticisms came on the day after the EBRD unveiled its Local Currency and Capital Market Initiative, which seeks to phase out short-term unsecured consumer lending in foreign currency.

Although banks have broadly welcomed the initiative, some senior industry figures have warned that it runs the risk of triggering a drop in foreign currency loans that could imperil economic growth by choking off credit supply to the regions.

As Emerging Markets reported yesterday, Charles Dallara, director of the Institute for International Finance, which represents leading banks, has warned that the biggest threat to local credit provision in the region lay with “new and pro-cyclical regulation”.

The initiative has been informally dubbed Vienna+, as modelled on the European Banking Co-ordination Framework, set up in Vienna in January 2009.

This brokered an agreement between the EU, IMF, World Bank, EIB and EBRD and banking regulators, among others, that parent banks would maintain their exposures in eastern Europe.

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