Europe since 1989: A History by Philipp Ther

Author:Philipp Ther [Ther, Philipp]
Language: eng
Format: epub
ISBN: 9781400882892
Publisher: Princeton University Press
Published: 2016-08-28T22:00:00+00:00

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

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