The Polish “Stop BankingInjustice Association” is one of many grass root organisations that have sprouted in many European countries in the last few years, due to FX loans: retail lending to people only with income and assets in their domestic currency. Today, the Polish organisation held a meeting in the Polish Parliament in order to explain the politicians and others the status of FX loans affairs in Poland and elsewhere in Europe, with speakers inter alia from Italy, Spain, Ukraine, Hungary and Iceland. – Interestingly, only in Iceland have the FX loans been dealt with, fairly speedily though never without pain for the borrowers.
The problems of FX loans in Iceland came up fairly quickly after the banking collapse in October 2008. No wonder, the króna had collapsed and everything linked to the currency rates was rapidly rising. To begin with, I was not particularly interested, felt that the borrowers should have been aware of the risk, not much to do. However, after getting an email from a Croatian FX borrower, telling me of the plight of FX borrowers in her country, I started looking at these loans in a wider perspective.
FX loans: a wandering curse for more than 40 years
In short, FX loans have been a wandering curse, going from one country to another, for over forty years. There is abundant evidence that FX loans are utterly unsuited as a standard financial product for ordinary people with no income in FX and no buffer.
I have earlier pointed out this wandering curse element of FX loans, how they have wandered from country to country – Australia in 1980s, New Zealand in the 1990s, also in Austria, Germany, Italy and then after 2000 in Iceland and many countries of Central and Eastern Europe – is quite remarkable and also the fact that the pattern is always the same: it ends in tears. This is not a case of this time it’s different; indeed, it’s always the same.
Lessons learnt long time ago, yet banks keep offering FX loans
This statement from the Australian FX loan saga, captures the risk perfectly: “…nobody in their right mind, if they had done a proper analysis of what could happen, would have gone ahead with it (i.e. FX loans).” And in 2013 the Austrian National Bank warned: “Foreign currency loans to private consumers are not suitable as a mass product…” This was the lesson that the Austrian Finance Market Authority, FMA had already drawn in 2008 but only in 2013 did it state this so clearly and unequivocally.
The FX lending pattern is always the same: the banks have the need to hedge themselves, for various reasons (usually because their financing is in some way FX linked) so they offer retail FX loans. Because the interest rates are lower than the domestic rates people can borrow more, thus in a certain sense creating sub prime lending, from the point of view of the capacity to service loans in the domestic currency.
FX loans, sub prime aspects and the unavoidable shock
Given that the loans normally stretch over years and even decades and FX fluctuations happen quite frequently, it’s clear that the circumstances at the time when the loan is issued are unlikely to stay unchanged. It can be argued that borrowers with FX assets or available funds can profit from FX loans over the lifetime of the loan. That however is not the situation for the majority of FX borrowers who at the outset borrow what they at most can service.
In all countries, where FX retail loans have become widespread, the pattern has always been the same: first, the borrowers are castigated for taking loans they then can’t service. Then, the sub prime lending aspects appear: banks haven’t really informed the clients properly, minimised the risks etc and haven’t done the due diligence as to what would happen to these clients should the currency rates change. The question how far authorities should go in protecting people is certainly justified but all European countries do indeed have a strong focus on consumer rights and scrutinising the banks’ information and behaviour with regard to FX loans should be obvious.
The ruling of the Árpad Kásler case, in the European Court of Justice, ECJ, ECJ C?26/13 in 2014 turned the tables against the banks and in the favour of borrowers. Slowly slowly, the sub prime aspect, the insufficient information and the fact that these loans are normally not really FX loans but FX indexed loans has also mattered.
Iceland and elsewhere: FX indexed loans illegal, not FX loans per se
Iceland is the only country in the recent FX loan saga where the loans have sytematically been written down. In that sense, the Icelandic FX loan saga is success from the point of view of hard-hit borrowers. But it didn’t happen over night, it took time: the króna collapsed in 2008 and kept falling until late 2009. The two first Supreme Court rulings, testing the validity of the loans came in summer of 2010. Only by the end of 2014 and after ca. 30 Supreme Court rulings had the loans been recalculated.
The Supreme Court ruled that FX loans are not illegal but the FX lending isn’t really a FX lending but lending in domestic currency where another currency or a combination of more than one currency set the interest rate.
At the conference there were FX loan stories from different European countries, reflecting the state of affairs in the respective countries. In general it can be said that courts, taking note of the Kásler ECJ case, have at times ruled in favour of borrowers but it differs how willing courts are to take note of the precedence.
In Italy, FX loans cases have been in the courts for five years but have yet to reach a verdict in the lowest court. In Ukraine, there has been a moratorium on enforcing FX loans collaterals since 2014.
All in all, what is generally needed is an acknowledgement of the fact that FX loans all follow a similar pattern, no matter if it’s Australia in the 1980s or Spain in the 21st Century. FX loans are a type of sub prime lending and not a product fit as a general product. Until banks and authorities draw the same conclusion as the Austrian central bank and the Austrian Financial Services Authority in 2013 banks can go on selling these poisonous product and pretend to be surprised when it goes, so predictably, wrong.
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