Ukraine banks face huge losses from populist loan law
July 03 2015 09:22 PM
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Yaresko: For stability in banking system.

Reuters/Kiev

A move by Ukraine’s parliament to convert retail loans issued in foreign currencies into hryvnia at a rate much more favourable to borrowers will cost banks billions and smacks of misguided populism, Finance Minister Natalia Yaresko said yesterday.
People have picketed parliament after a 50% depreciation in the value of the hryvnia against the dollar in 2014, and a further 25% slump since the start of this year, left many Ukrainians struggling to service their loans denominated in foreign currency.
It is an issue other Eastern European countries such as Poland and Hungary have had to wrestle with, after their citizens took out loans in currencies they thought would be cheaper and more stable than their own.
Late on Thursday, Ukraine’s parliament passed a law which would oblige banks to exchange foreign currency consumer loans into hryvnias at a rate valid in the period when the loan agreements were signed.
It means that the majority of the debts would be exchanged at a rate of 5.05 hryvnia to the dollar, while the current price of the US currency stands at 21-22. “It is populism that has nothing to do with fairness. This step would create about 95bn hryvnia ($4.5bn) of potential losses for the banking system”, Finance Minister Natalia Yaresko said on her Facebook page yesterday.
“All citizens will pay the price for this in the form of a weakened banking system and fresh bank insolvencies,” she said.
The central bank estimates potential losses even higher, at 100bn hryvnia if Ukraine’s president signs the law and banks are forced to exchange $5.9bn of loans at a rate of 5.05 to the dollar.
“Adoption of the bill will have a devastating impact on the financial and banking system,” the central bank said in a statement. “Such innovations will lead to mass bank insolvencies.” Since the start of last year Ukraine has closed 51 banks that became insolvent due to an economic recession and huge deposit outflow caused by the weakening of the hryvnia.
Ukraine’s banking system posted losses of 25.2bn hryvnia in January-May 2015 on top of 53bn hryvnia losses in 2014. The central bank said the bill would conflict with the International Monetary Fund bailout program under which Ukraine expects to receive $17.5bn of financial aid in 2015-2018.
The broader IMF-led bailout could bring Ukraine about $40bn in this period, but the country has to stabilise its banking system and strengthen government finances to qualify for the assistance.


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