Monday, January 26, 2015

"The Swiss franc appreciation and the sorry saga of FX lending"

From our Dec. 7 post: Evans-Pritchard: "Dollar surge endangers global debt edifice, warns BIS":

Two quick points*:
1) This is the second BIS warning in under six months.
2) It is very dangerous to borrow in a currency other than the one in which you earn your income.

True at retail, true at wholesale....
Reprised in "'Russian ruble's fall: A classic 'currency collapse'" and Why It's Such a Big Deal".

From A Fistful of Euros:
Back in the 1980s Australians, many of them farmers, were offered low-interest loans, appealing in a high-interest environment. With changes in currency rates the loans in Swiss francs and Japanese yen quickly became much beyond the means of the borrowers to service with ensuing pain and suffering. Icelanders felt the pain of FX loans as the Icelandic kr√≥na depreciated in 2008 as did many Eastern-European countries. – The same story has played out in country after country with the obvious lesson reiterated: for people with income only in their domestic currency FX borrowing is far too risky. All these loans, often the result of predatory lending, follow the same pattern and it is no coincidence where they hit. There is now ample case for countries to take action: banks should be forbidden to lend in FX to private individuals with no FX income. 

Australia in the 1980s, New Zealand in the 1990s, Iceland and a whole raft of other European countries in the 2000s saw liberalised markets but inflation was high and so were interest rates. By taking an FX loan or even just a loan pegged to FX the high domestic interest rates could be avoided – it seemed too good to be true.

Sadly it was indeed too good to be true: currency fluctuations changed the circumstances and servicing FX loans for those with income in the domestic currency became unsustainable. For loans running over many years this was, statistically seen, almost unavoidable. FX loans have turned into a huge problem in countries such Croatia, Bosnia, Bulgaria, Montenegro, Poland and Ukraine but politicians and banks have ignored the problem.

These cases were spelled out at a conference on CHF/FX loans in Cyprus in December. Organised by Katherine Alexander-Theodotou president of the UK Anglo-Hellenic and Cypriot Law Association and various representatives of organisations fighting FX loans, the organisers have recently set up European Legal Committee for Consumer Rights to co-ordinate their work in the various countries marred by FX loans....MUCH MORE
HT: The Big Picture