Hungarian and other emerging European businesses, households and local governments have heavy exposure to lending in the soaring Swiss franc and European Bank for Reconstruction and Development chief economist Erik Berglof said the bank had been helping Hungarian and Polish banks reduce that exposure through swap operations.
“What’s worrying is there are some ideas in terms of forced conversion that are quite dangerous and could undermine ... confidence in the credit system,” Berglof said.
Hungarian shares and currency fell heavily on Monday and sovereign debt insurance costs surged to 2-1/2-year highs, after a member of the ruling party proposed allowing holders of foreign currency-denominated mortgages to repay their debt in one go at an artificially low exchange rate.
Hungarian Prime Minister Viktor Orban said the plan was “feasible” but warned against forcing banks into mandatory debt conversion, allaying some market fears.
One of the banks most affected by the proposal was Hungarian bank OTP, in which the EBRD has a stake.
OTP shares were suspended on the Budapest Stock exchange on Monday at the bank’s request, pending Orban’s announcement.
However, Berglof said OTP “has come out well in the post-financial crisis response.”
EBRD economists Piroska Nagy and Alexander Pivovarsky said in a blog published on Monday that severe financial market stress, weak second quarter growth in some countries and the deepening euro zone crisis were hitting the EBRD’s region of operation.
As financial sector fragility extends beyond Greece, whose banks were active in southeastern Europe, more emerging European countries could be affected, they added.
Emerging European banks, many owned by Western European parents, could be vulnerable, as they were during the global financial crisis, Berglof said.
“People will have to be prepared for western governments again to give very substantial support to parent banks,” he said, adding that the political will to do so may have been diminished by the euro zone’s weak financial situation.
G8 ministers agreed last weekend to nearly double their funding to conflict-hit North Africa, to $38 billion from previous pledges of $20 billion, and the International Monetary Fund said it would make a further $35 billion available.
The EBRD is awaiting a decision by its 63 country and institutional shareholders to extend its mandate to North Africa, with the decision due around the end of October.
The EBRD is hoping to play a key role in investing in the private sector in the region. Egypt, Morocco, Tunisia and Jordan have already indicated they want to benefit from the EBRD’s investments, expected to total around 2.5 billion euros a year, but the process of becoming a recipient of EBRD funds is slow.
Shareholders will also vote on setting up a special fund to allow the EBRD to invest in the region, starting around next summer, Berglof said.
Berglof said the EBRD would likely publish growth forecasts for the region alongside its annual growth outlook, due in November.
Investors expect Libya, whose ruling interim council attended the weekend G8 meeting, also to benefit from international investment, including from the EBRD.
“It’s premature to speak about what the IFIs (international financial institutions) will do in Libya,” Berglof said, adding the EBRD had not had discussions so far with Libya.
