Forex loans put eastern European banks at risk

A boom in foreign currency lending is a growing risk to banks and economies in central and southeast Europe, according to a report by Standard & Poor's, the credit rating agency.

The S&P report gave its sternest caution to Hungary for its combination of high forex lending - particularly to unhedged consumers and small businesses - high exchange rate volatility and a looming economic slowdown.

In addition to Hungary, S&P labels Romania "high risk" for its exposure to foreign currency lending. Croatia and Poland are ranked as the next most vulnerable, or "medium risk".

Slovakia, the Czech Republic, Bulgaria and Slovenia are categorised as "low risk".

At the end of 2005, foreign currency loans totalled more than half of all outstanding credits in Hungary (51 per cent), Romania (54 per cent), Bulgaria (52 per cent) and Croatia (78 per cent).

Adding to worries for Hungary, Romania and Poland, forex loans given to individuals have grown dramatically. Retail forex loans now total about one-third of all forex loans in Hungary and Poland, and more than 40 per cent in Romania.

Individuals and small companies pose a greater risk than large corporate borrowers because they generally lack revenues or reserves in foreign currencies.

They are, therefore, fully exposed to exchange rate fluctuations. Borrowers of foreign currency loans must also repay them in domestic currency, meaning monthly payments rise when the local currency weakens.