Today’s earnings report by Austria’s Erste bank is much worse a read then the bank is willing to admit.
Erste’s bad debt charges are 2 billion euros – for the fourth straight year! – and we know that banks loath and postpone and minimize any which way possible the size of those charges.
Erste blames the charges on loans going bad in Hungary and Romania. Bloomberg says that in both of these countries “about one in four loans on Erste’s book is delinquent” but that is a backward statistic.
Erste is part of a group of banks like Austria’s Raiffeisen, Italy’s UniCredit and Greek Alpha that were brave to storm the former communist markets of eastern and central Europe and offer novel banking services including foreign currency denominated loans.
Swiss Franc was popular and the low rates on Franc got many Hungarians to mortgage themselves, but now that the local currency has tanked and the Franc has strengthened, there are billions of Euros that may never get paid off.
One suspects that Swiss authorities, last year, must have, among other things, taken notice of these billions of bad Franc-loans when they decided to set a ceiling on the value of their currency – it sure put Austria at a greater ease that the country’s banks would not suddenly implode.
Hungary, a country that leads in the amount of bad Franc-debt, has asked the IMF for a loan and has pawned off the dependence of its central bank in exchange for an undetermined amount of EU financial help.
Yet Hungary maybe aiming for another source of funds – Russia.
It recently pulled out of the German-led Nabucco gas pipeline in favor of the Russian South Stream pipeline because it suits Hungary’s “strategic interests”.
Getting hold of more cash is Hungary’s strategic interest as of right now so it is conceivable that by the end of 2012, perhaps, we may hear of a Russian loan to Hungary for something or other.
The rapprochement with Russia suggests that problems in Hungary are much worse then what they appear and that banking troubles in that region should escalate.
The fact that Erste has been writing off bad loans at a 2 billion clip for 4 years does not mean that the bottom in bad loans is in but that the bank may have been economizing on the amount of write-offs. One suspects that Erste and the others could soon begin to increase their economization to larger clip so that as many of us are too busy starring at Spain, eastern European bankruptcy may sneak in.