The banking system, close to getting a seizure

The draft law which says that borrowers that have taken out loans denominated in foreign currencies may be allowed to repay early or to refinance their loans at the exchange rate effective at the time the loan was contracted was approved yesterday by the Commission for Industries of the Chamber of Deputies, UDMR deputy Odon Szabo, one of the initiators of the draft, told us.

The draft went tacitly through the Senate, and it is set to be approved by the Chamber of Deputies, which is the decision-making chamber of the Parliament, even though, all this time, the banking system has exerted heavy pressure, to stop it from being passed, as political sources told us.

"There is enormous pressure from the banking system for the initiative to be withdrawn. We are getting new versions which favor the banks, we are being threatened and even worse. The banks are lobbying for the elimination of the draft, claiming that it would cause the market to grind to a halt".

Our sources are saying that lately, even the representatives of the international institutions are lobbying in favor of repealing this kind of initiatives.

In the opinion of UDMR deputy Odon Szabo, banks should be solidary when it comes to this kind of project, because otherwise, they could be faced with a large number of non-performing loans.

According to the argumentation for the draft law which is currently being discussed in the Parliament, the new regulations would amend Ordinance 50/2010 concerning consumer contracts, "by granting consumers that have loans denominated in foreign currencies the option to ask lenders to recalculate the amount to be repaid in the national currency, using the exchange rate effective on the date the contract was concluded".

The document claims that under the current economic circumstances, an insufficiently tapped option by the Romanian banks would be the equal sharing of the currency risk with the borrowers.

"Even though neither the domestic nor the European legislation expressly stipulate the creditors' obligation to warn potential debtors about the major risks that they are exposing themselves to by borrowing in foreign currencies or about the perils of overleveraging, we think that such an action would have been beneficial, if for no other reason than to protect the banking system from itself, by reducing the number of non-performing loans", the argumentation further states.

According to the UDMR deputy, calculations show that those who opt to refinance their loans under the new terms, would gain at least 20% and up to 50% of the amount that they would have to repay at today's exchange rate.

"There are situations, particularly for loans denominated in Swiss Francs, where the repayments have increased by as much as 80%, even though there is a draft Directive that does not allow increasing loan installments by more than 20%", according to Odon Szabo.

A few months ago, Adrian Vasilescu, advisor to the governor of the NBR, was saying that the loans denominated taken in the controversial currency exceed 1 billion lei. At the time, he said that the banking system would not be affected by a potential decision to convert the loans denominated in Swiss Francs to the local currency at the exchange rate that was in effect at the time the loan agreements were concluded: "The amount of money which the banks would no longer collect if it was decided that the exchange rate differential paid for loans denominated in Swiss Francs is abusive would not exceed a few hundred million lei, which, for 40 banks, which is how many there are in Romania, is not a threat. Nor is it a threat for those that have granted loans".

In spring, the representatives of the NBR were saying that those that borrowed in Swiss Francs should have been aware that there was a significant risk involved in taking out this kind of loan.

It is hard to imagine that an exotic currently like the Swiss Franc could be as cheap as it was for thirty years before the crisis, NBR vice-governor Cristian Popa said at the time: "I think that the fundamental question gets asked in terms of the covered costs and specifically, aside from this proactive measure to educate the public, what needs to be taken distinctly into account is the exchange rate risk of a loan, especially in the case of a currency like the Swiss franc. We can now talk about the potential exchange rate differential over time, and who should cover it. And in that regard, I have to admit that we need to study things because things aren't very clear to me".

The NBR official said that the Central Bank has advised people not to borrow in foreign currencies, especially in exotic currencies, which the NBR can control, and said that the NBR warned at the time when "everybody was thinking that they had discovered the potential bonanza" of the loans denominated in Swiss francs that it might be a "false comfort" and that over 20-30 years - the duration of a mortgage - there is a high possibility of reversals occurring - either in the exchange rate, the interest rate, or both.

Even though these statements seem to demonstrate that the NBR and the banking system would not be affected by the passing of such a legislative act, the statements made a few days ago by the officials of the NBR, quoted by Hotnews have a different meaning: "The NBR can not support any legislative proposal which concerns making it mandatory for the lender to repay loans denominated in foreign currencies at an exchange rate which is different than the one which was in effect at the time of the restructuring of the loan (for changing the currency of the loan), because it goes against the legislation of the EU on the matter - Directive 2014/17/EU of the European Parliament and of the Council concerning loans granted to consumers for residential real estate, of February 4th, 2014 - an act of the European Community which needs to be transposed into the legislation of the member States no later than March 21st, 2016".

In this context, Odon Szabo told us: "The Central Bank is referring to a European Directive which could stop our project. But the NBR did not read carefully enough the text of the European legislation. A European directive does indeed exist in this sector, but this will not be applied prior to 2016. Until then, countries may organize their loan portfolios according to their own rules. Therefore, only after 2016, when a single European law will exist concerning loans denominated in foreign currencies, will there be some restrictions when it comes to this type of loans. The NBR is not siding with the citizens, it is siding with the banks".

The exposure to Swiss francs out of the total loans granted to the non-governmental sector is 4.1%, according to the deputy governor of the NBR, who says that the ratio is far lower than in other countries, because a large portion of the loans has been refinanced between 2009 and 2010.

According to lawyer Gheorghe Piperea, one third of the borrowers are in default. He said that, whereas in 2010, there were about 5.5 million borrowers, out of whom about 750,000 were unable to repay them, now, more than 1 million borrowers are in default, out of approximately 3.2 million borrowers.

• Piperea: "Banks have begun notifying their customers that they can convert their loans into Swiss francs"

2,400 people who have borrowed in Swiss francs have filed lawsuits against the banks that they took out the loans from, according to law Ph. D, Gheorghe Piperea, the lawyer who represents the plaintiffs in the two waves of collective lawsuits.

The first hearing at the Court of Bucharest took place yesterday, and it was postponed until November 13th, as the judge asked for an estimate of the gains that the plaintiffs would see if the lawsuit were filed, according to Mr. Piperea.

He told us that the list of banks that were sued by borrowers in Swiss francs include Volksbank, Raiffeisen, Bancpost, Credit Europe Bank, Piraeus Bank, Millennium Bank.

The plaintiffs are requesting the repayment of the loans at the leu-Swiss franc exchange that was in effect at the time of their contracting, as the Franc has strengthened greatly compared to the Romanian currency.

Gheorghe Piperea said: "The Swiss franc has risen chaotically over the last few years, amid the crisis, because all the speculative investors are placing their money in this exotic currency, which is considered a safe haven currency, and in gold. It's a whole different situation than that of the Euro-RON exchange rate, which is very strictly contained within a narrow band by the National Bank of Romania. The NBR intervenes in the market whenever there is a need for that exchange rate to be kept relatively stable, excises and other payments are calculated in Euros, whereas the Swiss Franc fluctuates according to supply and demand, of which the former is still very high".

In this contest, in 2011, there have been cases where the debtors had to pay installments that were 2.5 times higher in 2011 than they were in 2007, according to Gheorghe Piperea.

The lawyer said that Romanian banks are currently not granting loans in Swiss Francs, and some of them, such as Volksbank for instance, have begun, since back in January-February, notifying their customers with ongoing loans that they can convert their loans denominated in Swiss Francs to Euros, but nevertheless warning them that loans denominated in Euros also involved currency risks.

Gheorghe Piperea reiterated that the situation of the people that borrowed in Swiss francs is far worse in Romania than it is in Hungary: "Whereas in Hungary, the debtors repay their loans in forints, at the CHF/Forint exchange rate practiced by their lender, in Romania, those that have to pay loans taken out in Swiss Francs, either buy this currency from the market, at a very high price, provided they actually do find Francs to buy (this currency is very rare in Romania), or they pay their installments at the bank, with the lender first making the conversion from lei to Euros and then from Euros to Francs, at he exchange rate valid on the day of the payment, with each of the two operations involving further commissions, as well as significant losses derived from the exchange rate".

The madness of the conversion of loans denominated in Swiss Francs is not confined to Romania.

Regulators want the elimination of loans denominated in foreign currency in Eastern Europe, because they have brought some countries on the edge of default, during the credit crisis. Such loans offer beneficiaries in emerging countries lower interest rates, but the repayments can increase if the local currency weakens, as has happened in Hungary, Romania and Ukraine.

The governor of the Central Bank of Poland, Marek Belka, advises lenders to eliminate mortgage loans denominated in Swiss francs, before the members of their respective parliaments force them to convert them into the local currencies, which could cause them losses, like it has happened in Hungary.

Loans denominated in foreign currencies could tempt populist politicians to follow the example of Hungarian prime-minister Viktor Orban, who forced banks to take billions of Euros in losses, Belka said in an interview, quoted by Bloomberg.

At the same time, banks that are trying to convert mortgages from foreign currencies to the local currency are faced with the reluctance of the borrowers, who do not want to give up the more favorable financing terms that they are currently getting.

"It is an attractive issue for all categories of politicians. I have asked banks to do everything in their power to eliminate loans denominated in foreign currencies and as far as I know, they are open to doing that. The problem is that monthly repayments for loans denominated in francs are lower than they are for those in Zlotys, and the borrowers don't want to bear higher costs", the banker said.

Over the last three years, Hungarian prime-minister Viktor Orban has applied the most aggressive policy of converting mortgages denominated in Swiss Francs. In 2011, Hungary forced banks to take losses of 1.7 billion dollars, when it allowed borrowers to fully repay mortgage loans denominated in foreign currency, at an exchange rate lower than the one effective in the market.

This year, Hungarian banks will bear more losses, as they will be required to repay commissions of up to 3.8 billion dollars charged on the loans they granted and convert into the local currency the remaining loans denominated in the foreign currency.

This spring, The Court of Justice of the European Union issued a ruling in favor of the plaintiff in the case Kasler vs OTP Hungary. According to the European Court of Justice, whereas so far some judges thought that the cases dealing with currency exchange rate differentials were not the concern of the courts because that difference represented part of the cost of the loan, in the future, the courts will be allowed to issue rulings in such cases, and decide whether the clauses in question were abusive or not.

Concerning this decision, Răzvan Horaţiu Radu, government agent (lawyer) of Romania with the Court of Justice of the European Union, told us: "The decision comes on the back of older case law of the Court of Justice of the European Union which has the tendency to ensure a balance between consumers and banks. Even though the ruling in question concerns a case which is on trial of a Hungarian court, the principles deriving from it are applicable to every EU member state. It is worth noting that the Court of Justice of the European Union grants an important role to the national courts, when it comes to analyzing the relationship between consumers and banks where issues arise concerning abusive clauses".

The ruling issued by the Court of Justice of the European Union in the Kasler vs. OTP Hungary case has sparked heavy controversy on the Romanian market, as bankers and lawyers interpreted the ruling of the European court differently. Even the lawyers were divided into camps over the resolution of the Court of Justice of the European Union, as some represented the borrowers, while others defended the financial institutions.