ECB’s Nowotny Says Hungary Must Realize Solvent Banks Needed

Jul 11, 2014 3:42 am ET

(Updates with shares in fifth paragraph.)

July 11 (Bloomberg) -- European Central Bank Governing Council member Ewald Nowotny called on Hungary to be mindful of its economy’s needs when inflicting a fresh round of losses on banks including units of Austrian lenders.

Nowotny, who also is the governor of the Austrian central bank, identified Hungary as one of the “problem areas” of Austrian banks, which are among the biggest in the former communist part of Europe. The “major exposure” of the lenders, which include Erste Group Bank AG, Raiffeisen Bank International AG and UniCredit Bank Austria AG, make the neighboring country a “more sensitive issue” than even war-torn Ukraine, he said.

“The problems are less economically than more politically motivated,” Nowotny said in an interview in London yesterday. “We do hope that also the Hungarian government will understand that it’s in their own interest to have a sound banking system.”

Austrian banks bear a big part of the burden Hungarian lawmakers imposed on the lenders when they approved a law last week forcing them to reimburse clients for costs linked to loans going back as far as 2004. The move is part of Prime Minister Viktor Orban’s efforts to punish banks for having extended loans in foreign currencies over the past decade, which soured after the forint’s drop in 2008 led to soaring repayment costs and delinquency rates.

‘Success Story’

Erste, which expects to lose 300 million euros ($408 million) because of the law, snapped a 7-day plunge today, climbing 3 percent at 9:41 a.m. in Vienna. Before today it had declined 23 percent since warning last week that it will have a record loss this year because of the Hungarian charge, as well as from writedowns in Romania.

Raiffeisen anticipates the Hungarian law to cost as much as 160 million euros, it said this week. Both banks’ losses could rise if a planned conversion of foreign-currency debt imposes further burden on the banks. Bank Austria, which wrote off 2 billion euros on other eastern European units in March, said yesterday it couldn’t estimate the cost of the Hungarian law yet and expected to be profitable in the country nevertheless.

Even so, Nowotny, 70, said that Austrian banks’ expansion in countries in eastern Europe, many of which had been part of the Austro-Hungarian Empire before World War I, was beneficial in the long run.

“I still think, at the end of the day, that the engagement of Austrian banks in eastern Europe is a success story,” he said. “Over all these years, Austrian banks in total have been profitable in central and eastern Europe, which you can’t say for other parts of the world.”

Earlier this week, Austria’s central bank said that the country’s lenders should review their business model after they had to use 44 billion euros, or almost two-thirds of their operating profit since 2008, on provision for delinquent debt. Rapid credit growth had fueled bank earnings and economic growth until 2008 as clients borrowed to buy homes, cars and consumer goods. When economic growth contracted, bad loans and writedowns soared.

--With assistance from Edith Balazs in Budapest.