July 4, 2014 3:31 pm

Erste Group Bank: they’re in forint now

Debt forgiveness is catching on in Hungary

Google started enforcing a right to be forgotten this week. If you ever use this ability to scrub search results about yourself (Are you a nervous bank chief executive?) remember this: it began with a debtor. Mario Costeja González sought to expunge a story about repossession of his home to pay debts when he sued Google.

If to forget is also to forgive (debts), markets hardly require Google’s assistance presently. Ecuador has sold bonds with an 8 per cent yield. Creditors forgot or forgave its 11 defaults over two centuries – the last in 2008.

Friday’s 15 per cent plunge in shares of Erste Group Bank will remain seared upon the minds of their holders for a while, though. The Austrian lender to emerging Europe warned on profits for the third time in little over a year. Forecast 2014 net losses of up to €1.6bn reflect €1bn in intangible asset writedowns within Erste’s Romanian unit, and €700m in increased losses on loans in both Romania and Hungary. So go the details. But more broadly – and critically for investors looking for reasons to hold its shares through sombre guidance for 2015 – Erste’s pain is debt forgiveness itself.

About €300m of the increased lending losses are in loans Erste made to Hungarian borrowers in foreign currency (mostly Swiss francs), before the crisis blew out interest rates. The exposure is hard to forget. A law passed by the Hungarian parliament on Friday positively ensures this. The legislation will retrospectively require banks to refund any difference on exchange rates for the calculation of loan amounts and repayments due. Painful enough. But rewriting contracts is only the start.

What if Hungarian lawmakers simply convert all outstanding foreign-currency loans to forints? Just under €12bn of these loans remain, down a third in half a decade, after previous debt relief. Almost a quarter of this balance are classed as non-performing. One-off conversion at below spot exchange rates would impose haircuts on lenders and leave them without assets to fund forex liabilities, says Deutsche. Forgetting things (and debt) has a new social status. Still, someone must pay for it.

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