Predatory Lending in Central and Eastern Europe

One of the most difficult legacies of the pre-crisis period has been the many billions of foreign currency loans. Since these loans were highly speculative and given to borrowers with weak financial records, Joseph Stiglitz’s term “predatory lending” seems just as appropriate for Eastern Europe as it is for the United States.16 International banks and their national subsidiaries in the new EU member countries were keen to beef up the amount of lending. They did so by arranging loans for prospective homeowners and private consumers not in their national Eastern European currencies, but in euros, Swiss francs, or other foreign currencies. In this way, the debtors were told, they could take advantage of the lower interest rates in Western countries. But as the Hungarians, Poles, Latvians, or Ukrainians did not earn euros or Swiss francs, they paid off their loans in their respective national currencies. The benefit of low interest, then, was counterbalanced by the risk of currency fluctuation. Overall, foreign currency loans were more attractive for banks than for their clients: on top of the usual fees, the banks earned money on converting the currencies and could also add a substantial markup to the comparatively low interest rates in Switzerland, Germany, or wherever the bank was based.

If they had looked back to 1989–91, the citizens of the former Eastern Bloc might have remembered that exchange rates can fluctuate and even tumble. But since the turn of the century, Poles, Czechs, and Hungarians—and since the mid 2000s, Romanians, Bulgarians (who had experienced triple-figure inflation rates in the late nineties), and even Ukrainians—had known only stable or revaluated national currencies. The dollar, once the under-the-mattress reserve of the Eastern Bloc, was weakened. Between 2000 and 2008, it steadily lost value against the Polish złoty, Czech crown, and Hungarian forint. This state of affairs made foreign currency loans attractive in the first place—unlike in the nineties when the currencies of postcommunist countries were constantly depreciated in order to bolster exports and entice Western investors. At that time, purchasing power had been high in the former Eastern Bloc. Western tourists had been able to dine out for two or three dollars in the Czech and Slovak Republics (one of the reasons why thousands of young Americans went to live there, particularly in Prague). German and Austrian car drivers swarmed across the border to fill their tanks; the Viennese flocked to the coffeehouses of Bratislava, the Berliners to the Polish markets along the River Oder at the German-Polish border. Few local residents, however, could afford to travel abroad or buy Western products. But at least it was possible to get by on a monthly salary the equivalent of just a few hundred dollars.

From the year 2000, the situation reversed. Exchange rates changed in favor of the Eastern European currencies: wages and salaries rose, buoyed by these countries’ continuing high purchasing power, and, crucially, they possessed the asset most treasured by the international stock markets: positive forecasts. EU accession was in the cards; by 2002 the treaties had been concluded, awaiting only ratification, and the postcommunist economies were expected to grow robustly. After accession, the optimism bubbled over into excitement, and some of the new EU members were vaunted as “tiger economies.” The values of their currencies seemed to rise and rise, with only the Hungarian forint weakening for a spell in 2006, presaging the coming crisis. Banks granted ever more loans in foreign currencies,17 running aggressive advertising campaigns to sell their new product. The Hungarian Raiffeisen Bank (a subsidiary of Austria’s Raiffeisen Bank International) produced a particularly attention-grabbing TV commercial. In it, a Hungarian family is being advised about a loan at a bank. The father tries to report how much they earn a month but is repeatedly interrupted by the advisor, who says the amount is unimportant, puts her hands over her ears, and blurts “babababa” to drown him out. Finally, a sonorous, off-screen male voice assures the viewer that the property being purchased on credit is security enough.18 The press occasionally ran cautionary articles, warning of the risks linked to exchange rate fluctuations. But hidden deep in the business sections or supplements, they had about as much impact as the small print in a sales contract.19 The exchange rates and growth figures continued their upward trend; the entire transformation seemed to be a wonderful success story.

In fall 2008, the Eastern European bubble suddenly burst. The crisis, or to be precise, the drying-up and reversion of international capital flows, caused a dramatic drop in the values of Eastern European currencies. Within six months, a euro no longer cost 3.20 Polish złotys, but 4.90; the exchange rate for the Hungarian forint dropped from 1:230 to 1:300.20 These currencies fared even worse against the Swiss franc, which benefited from its reputation as a safe haven as the euro crisis loomed. The value of the Swiss franc rose from around two złotys in summer 2008 to three in winter 2009; from 143 forints to 200 forints. Unfortunately, the majority of foreign currency loans—over 90 percent in Hungary—had been arranged in Swiss francs. In bread-and-butter terms, this meant that a Polish or Hungarian family who had borrowed 100,000 francs to buy a home suddenly faced a debt mountain one-and-a-half times as high as they had bargained for—in this case, 300,000 złotys rather than 200,000, or 200 million forints instead of 140 million (which would have grown to 240–50 million forints by 2011 as the franc continued to rise).

This problem was not confined to the new EU member states. Austrian banks had also offered loans in francs (and Japanese yen) on the domestic market. In 2010 there were an estimated 250,000 foreign currency debtors in Austria, with combined debts worth 35 billion euros,21 or around 140,000 euros per debtor. Hungary and other postcommunist countries had their very own legacies of the neoliberal epoch to shoulder. According to the government in Budapest, around one million Hungarians had taken out loans in foreign currencies before the crisis.22 In Romania and Ukraine, too, loans in foreign currencies had made up over 50 percent of total bank loans.23 But Latvia, where Swedish banks had been particularly active, topped the charts. These countries’ economies suffered the worst slumps, while countries that had attempted to partially regulate lending markets (including Poland and the Czech Republic) were less badly hit. The specific effects of crisis in any given country were not only linked to types of foreign direct investment, as Bohle and Greskovits found, but also to another (closely related) factor—the volume of foreign currency loans allocated.

Ideally, banks would have refused to conduct such predatory lending or at least warned their clients of the currency risks. But there was method behind the madness. Transformation discourse had led to an idolization of private property and inflated demand for it in the postcommunist markets. Banks addressed the demand by borrowing money from their countries’ central banks, or on the international markets, to extend to their clients, adding on substantial markups. The postcommunist countries tend not to be tenants’ markets, as in Germany and Austria, but owner markets. City rents were often higher there than in Berlin or Vienna, and property prices relatively low. One exception was the former GDR, where the major exodus of around two million people to West Germany by 2000 left plenty of accommodation available, even in Berlin for many years.

The revaluation of loans was catastrophic for borrowers, who faced paying higher rates for longer or losing their recently acquired property. The foreign currency loan fiasco had repercussions for Eastern European politics. Hungarian right-wing populist Viktor Orbán curried favor by pledging to tackle the electorate’s unmanageable debts and put the international banks in their place. In September 2011 the Hungarian parliament enacted legislation providing for a sort of compulsory exchange: the foreign currency loans were to be converted into forints at an exchange rate determined by the government if the debtors paid off their loans.24 Around a third managed to do so, logically enough, the better-off borrowers. The banks that stood to lose out were mainly Austrian; they responded with protests and lawsuits, but eventually caved in and wrote off part of the loans. Orbán was to some extent vindicated when the European Systemic Risk Board (EBRD) and the Austrian Financial Market Authority (FMA) expressed serious concerns about the foreign currency loans, with the latter declaring in late 2010 that they were “not suitable to be a mass product.”25 It was too late for the many debtors, who struggled for years to pay off their foreign currency loans. But their fate did not warrant any headlines, unlike the Greek and Italian national debt crises.

The belated attempts to regulate borrowing on a national and European level brought the phase of foreign currency loans for private consumers to an end. This episode illustrates how the boom in the postcommunist economies was fueled and inflated, creating bubbles that eventually burst. Once again, these countries were serving as sites of experimentation, no longer with government reform policies (as in the nineties) but with private investors’ new business models. Riding the second wave of neoliberalism, international banks took advantage of the possibilities created by the deregulation of the international financial markets to devise and exploit a new product, foreign currency loans.

Reregulation took place in different spirits. While Western European governments and banking authorities confined themselves to issuing “recommendations” against foreign currency loans and largely echoed the language of finance, Hungarian prime minister Viktor Orbán, especially, fashioned himself the champion of the ordinary folk and debtors. His ostensibly left-wing policies demonstrate how far the left-to-right political axis has dissolved: his nationalist rhetoric and political courting of the middle classes have more in common with the traditional mode of right-wing parties. By pointing the finger squarely at the foreign banks, he demonstrated an obvious bias; after all, the borrowers had accepted the risks in order to profit from lower interest rates. This shows that neoliberalism did not only cater to the business and finance sectors but, as in the United States, also had a popular dimension.

The neoliberal order was accepted from below, by society. After years of vague promises for the future by reform politicians and communists alike, Eastern Europeans seized the opportunity to fulfill their immediate wishes.

The swing of the pendulum from communism to consumerism changed popular perceptions of time. The focus shifted from working toward a better future for one’s children, or waiting for reform promises to come true, to raising standards of living in the here and now. In broad terms, the younger generation has fewer children (in Poland, around half as many as in the early eighties), is more consumer-oriented, and lives more for the moment. Warsaw’s high-rise landscape offers ample space for billboards. The constant exposure to advertising stimulates desire for things that not everybody can afford, if they are realistic about their income. The statistics on car registrations illustrate this. Many residents of Warsaw bought cars on credit. When the crisis hit in 2009, the number of cars registered in the city fell by over thirty thousand. Evidently cars were quickly offloaded in anticipation of the crisis,26 which in fact did not hit Poland as badly as other countries. Another spontaneous reaction to the crisis (considered below) was labor migration.

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