Graham Stack in Kyiv -
In the wake of the financial crisis and the ending of credit booms all over Central and Eastern Europe, Romania is the latest country to consider legislation shifting the balance of power from creditors - mostly foreign-owned banks - towards individual debtors, who borrowed in hard currency for home, car and consumer good purchases, and are now hurting badly. The banks, unsurprisingly, aren't very sympathetic and are apprehensive about the potential consequences of the new law.
"Conservatively assuming that only consumer loans delinquent as of December 2009 will be written down, we estimate the banking system would take around a 10% capital hit," Moody's Investors Service said in a report on Romania's draft legislation, which is likely to sail through the lower house after passing through the upper house of Romania's parliament with a large majority.
The bill allows individuals who have lost their jobs or who have suffered other erosion of their financial status to benefit from a 25% principal write-down of their bank loans, and escape being publicly listed as defaulters by banks. "Because consumer loans amount to 36% of Romanian banks' total loans, the figure would be much higher if additional individuals in no real financial distress also take advantage of the bill," Moody's noted.
Radu Ghetea, CEO of top-five bank CEC and president of the Romanian Banking Association, agrees: "The immediate negative impact will be that the credit institutions will be forced to a higher volume of provisions and probably also to capital increase."
Moody's is warning that its negative outlook on the Romanian banking system might be exacerbated by the bill: "Romanian banks will face difficulties absorbing the shock of this bill, and its implementation could undermine their financial standing."
Steven van Groningen, CEO of Raiffeisen Romania, while equally opposed to the law, sees Moody's figures as unduly pessimistic. "Purely as a calculation this seems correct, " Groningen tells bne. "However this calculation results from a double worse-case scenario in which not only all overdue debtors would be declared insolvent, but also all of them would have the possibility to come up with 75% of the value of their debts in order to benefit from the 25% write-down. This is very unlikely to happen."
Van Groningen agrees, however, on the moral hazard risks the bill throws up. "Given the experience with the insolvency law for companies, there is a real risk that the law will be abused by people who are not in real financial distress and want to exploit the possibilities the law offers to reduce their debts. Here we should also take into account that the courts are already overloaded and that this might make it more difficult to prevent abuse."
Mihai Dudoiu of Tuca Zbarcea attorneys-at-law, one of the country's top law firms, explains that the law uses the concept of "excusable bankruptcy," which is defined as the situation, acknowledged by a court of law, of a bankrupt debtor who became bankrupt as a result of adverse economic or social conditions, but excluding gross negligence, bad faith or fraud of the bankrupt debtor. "Although this concept may limit attempts from bad faith debtors to go under the protection of the law, in real life things may not work just as well and activities in bad faith cannot be excluded," he says.
Sharing the pain
The banks are warning that the law could force them to restrict lending or charge more, just as the country slowly comes out of recession. "I see two major impacts," says van Groningen. "The first one is on the cost of lending; since credit losses for banks are likely to increase, cost of credit will go up as well. This means it will become more expensive to borrow money, which will have a negative impact on the banks lending activity and on the economy."
The second negative implication, according to van Groningen, is that banks might finance smaller amounts for mortgage loans because the collateral value of an apartment or house will be lower as result of the bill, which stipulates that defaulting homeowners can remain in their houses for two years.
While the banks argue that the law could slow the economic rebound, the law's sponsors from the left-of-centre Social Democratic Party argue the banks should share more of the pain with debtors struggling on account of devaluation and collapsing house prices in 2009, after the banks had disbursed loans far too freely during the credit boom that pumped up growth across CEE during the noughties.
Foreign-owned banks across the region are finding that, for all their economic clout, as new kids on the block they lack a strong political lobby in the parliament. And regardless of the merits of the bill, in politics supporting local debtor-voters is a better game than financial orthodoxy.
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