Eastern Europe Carry Trades.......

Over 50 percent of all loans in a foreign currency..... This "conservative" strategie is now backfiring.........No wonder the ATX in Vienna where lots of the dominant banking players are listed is one of the worst performing.. The main players in the Baltics are coming from Scandinavia and especially Sweden (UPDATE : Just in time Sweden braces for a Baltic backlash) ......... Here are more details about the debt & financing troubles in Eastern Europe..... On top of this i recommend this post Baltic Real Estate / Bubble World Tour on the the real epicentre....

Wenn über 50% aller ausstehenden Kredite nicht in der Landeswährung aufgenommen werden kann man nicht gerade von einer "soliden" Finanzierungsform sprechen.... Solange die nur Unternehmen betrifft kann man sicher noch ein Auge zudrücken...Wenn aber private Hypotheken und PKW´s über diesen Weg finanziert werden darf man sich über einen veritablen Kater nicht wirklich wundern......Kein Wunder das der ATX in Wien einer der am übelsten performenden Aktienmärkte überhaupt ist......Hier kommen weitere Details zur Schulden und Finanzierungslage in (der ehemaligen Boomregion ) Osteuropa. Die wesentlichen Spieler im Baltikum kommen aus Skandinavien und da besonders aus Schweden ( UPDATE: Wie passend Sweden braces for a Baltic backlash )....... Darüberhianus verweise ich auf ein früheres Posting aus dem Jahr 2007 Baltic Real Estate / Bubble World Tour das besonders auf das kommende Epizentrum der Krise eingeht.....


WSJForeign-currency borrowing, which is the normal way for Hungarians to buy homes, cars or other big items, are set to become more expensive because of the weak forint, which has lost about 12% of its value against the euro since Oct. 1.

Viktoria Erdos, a 30-year-old professional dancer smoking a cigarette in a café near Budapest's opera house, said her monthly payments on her Swiss-franc mortgage are up about 15%, but it isn't cramping her style too badly. "I'm buying fewer clothes and am partying a bit less," she said. "I'm not really worried yet."


But today's crisis is serious enough. Investors' concern has forced Hungary's authorities to seek a €5 billion ($6.7 billion) loan from the European Central Bank, as well as verbal support from the International Monetary Fund -- two gestures Hungary hopes will persuade investors that the country has strong allies.

All but one of Hungary's major banks are owned by big international banking groups based in Western Europe or the U.S. Around 40% of Hungary's short-term foreign debt is money that banks like Citigroup Inc. lent to their local subsidiaries, according to central-bank figures.

Around two-thirds of Hungary's foreign-currency debt is owed by the private sector, Mr. Simor said -- and most of that is owed by the local units of multinational companies, which dominate Hungary's business scene.

Credit Excess / Baltics

Wow! We have a clear winner in the category "easy credit". beforeThe the following charts and data are just breathtaking. .....The credit explosion explains why the Baltic Real Estate market is so "frothy".

Anschnallen! Wir haben den eindeutigen Gewinner in Sachen "Easy Credit" gefunden. . Die nachfolgenden Charts und Daten verschlagen einen aber wirklich den Atem....... Das erklärt natürlich auch diesen Bericht über den baltischen Immobilienmarkt.


Banking Risks Rise in Eastern Europe
Credit to the private sector has expanded at a fast clip in central and eastern Europe during the past decade, outpacing most other regions of the world.

Rapid credit growth (see Chart 1) reflects a number of factors:

• low levels of financial development and pent-up demand pressures following decades of socialist economic management;

• good macroeconomic discipline and membership in the European Union (EU), which lowered country risk premiums; and

• improved access to foreign capital following the entry of foreign banks and the opening of capital accounts.

Assessing the risks
Rapid credit growth has brought important benefits, helping channel domestic and foreign savings to households and investors and supporting financial sector development and economic growth in the region. But the brisk expansion of credit is raising concerns about macroeconomic and prudential risks (that is to say, whether banks remain sound).

Quantifying these risks is a challenge because countries in central and eastern Europe have not gone through a full credit cycle yet, and financial soundness indicators tend to improve in the upward phase of the credit cycle.

But experience in industrial and emerging market countries suggests that credit booms can be associated with unsustainable domestic demand booms, overheating, and asset price bubbles. Financial sector difficulties also cannot be ruled out—for example, loan losses may occur during a deep recession or following a large exchange rate depreciation if loans are denominated in foreign currency.

> from Baltic blues / Economist

How significant these risks are in central and eastern Europe and what role public policy should play in containing them are key questions facing policymakers.

Banking risks on the rise
On the surface, rapid credit growth in central and eastern Europe does not appear to have weakened banks. (It remains to be seen how the current turmoil in financial markets will affect banks in the region, but so far there have been no signs of a major fallout.) However, the reason financial soundness indicators are not yet pointing to a deterioration in credit quality could be that they are based on systemwide statistics rather than reflecting assessments of data from individual banks and there is a lag before bank data become publicly available.

Our analysis suggests that the granting of credit is becoming increasingly divorced from bank soundness—all banks, including weak ones, seem to be expanding at an equally rapid pace. This suggests that prudential risks are on the rise.

Our findings underscore the importance of forward-looking and risk-based supervision to keep the risks associated with rapid credit growth at manageable levels while maximizing the benefits of credit for financial development and economic growth.

In particular, supervisors need to give more attention to weaker banks that are growing rapidly. This would also be consistent with the risk-based approach to supervision that central and eastern European countries are moving to as they implement the new capital adequacy accord, known as Basel II.

Increased prudential risks are most apparent in the fastest-growing credit markets. These markets include lending to households, foreign currency-denominated or indexed lending, and lending in the three Baltic countries, where weaker banks are expanding at a faster rate than sounder banks (see Chart 2). A stronger policy response is thus warranted in each of these markets. Such a response may involve, for example, higher capital requirements and tighter loan classification and provisioning rules, differentiated on a bank-by-bank basis

But experience in industrial and emerging market countries suggests that credit booms can be associated with unsustainable domestic demand booms, overheating, and asset price bubbles. Financial sector difficulties also cannot be ruled out—for example, loan losses may occur during a deep recession or following a large exchange rate depreciation if loans are denominated in foreign currency.

How significant these risks are in central and eastern Europe and what role public policy should play in containing them are key questions facing policymakers.

Banking risks on the rise
Our analysis suggests that the granting of credit is becoming increasingly divorced from bank soundness—all banks, including weak ones, seem to be expanding at an equally rapid pace. This suggests that prudential risks are on the rise.

Increased prudential risks are most apparent in the fastest-growing credit markets. These markets include lending to households, foreign currency-denominated or indexed lending, and lending in the three Baltic countries, where weaker banks are expanding at a faster rate than sounder banks (see Chart 2). A stronger policy response is thus warranted in each of these markets. Such a response may involve, for example, higher capital requirements and tighter loan classification and provisioning rules, differentiated on a bank-by-bank basis

Baltic Real Estate / Bubble World Tour

Speaking of a rolling bubble....... I have visited Tallinn in 2004 and it is a beautiful city with lots of history. Back then the city was a big building site with renovations etc going on almost at every corner and i was already stunned from the 2004 prices. In hindsight these offers looks like bargains.....

Ich habe Tallinn im Jahr 2004 besucht. Eine traumhafte Stadt mit jeder menge Historie. Seinerzeit war es bereits eine einzige Baustelle (überwiegend Renovierungen). Beim Blick ins Maklerbüro konnte ich schon 2004 die Preise kaum glauben. Rückblickend waren das allesamt echte Schnäppchen.


this is from Bloomberg http://tinyurl.com/242umm

Standard & Poor's Ratings Service on May 23 changed Lithuania's credit outlook to negative from stable, warning of a ``hard landing.'' To avoid a rating cut, Lithuania needs to rein in spending to help curb domestic demand and banks should tighten lending policies to reduce credit growth, the rating company said.

The country's application to adopt the euro at the beginning of this year was rejected because the inflation rate exceeded EU criteria. The government has refused to set a fixed target date, saying the best time for euro adoption will begin in 2010 when inflation is expected to slow

Property in the Baltics, till recently Europe’s hottest residential investment destination, is now expensive. Apartments in the capital cities of Baltic countries are priced at around the same level as Copenhagen, Helsinki and Stockholm...

Why have Baltics’ property prices surged so strongly? Research suggests that long term property price rises are strongly correlated with high GDP growth rates (though there are many other additional factors).

>Like "exotic financing" in the us.....or as in the case of the baltics financing in a foreign currency (mainly €)......According to the SEB (Swedish bank) almost 70 Percent!!!!!! in Latvia are using € mortgages......

>Wie zum beispiel die halsbrecherischen finanzierungsformen in den usa..... In den baltischen staaten wird zu einem hohen anteil die immobilien in fremden währungen (hautpsächlich €) finanziert.....Nach Zahlen der schwedischen Bank SEB lauten in Lettland schon 70 Prozent der Kredite auf Euro

The list of European countries which in the past five years have experienced high per capita GDP growth is, unsurprisingly, headed by Latvia, Estonia and Lithuania – which all experienced above 8% GDP per capita growth (as did Belarus, where however foreigners cannot buy).

While the Baltics’ continued strong GDP growth suggests continued good news for residential investors (Latvia returned 10.7% GDP growth in the first quarter of 2007), one trend is worrying for investors – income returns on property investment in the Baltics are falling.

Estonia.
In Tallinn, city centre prices increased, in the two years to end-2006, from around €1,358 per sq. m. in December 2004 (average of all apartment sizes), to around €2,432 at end-2006, according to Global Property Guide estimates – an increase of around 79%.

However, monthly rents did not move much upwards. They increased from an average of €9.8 per sq. m., to around €11.6 per sq. m.(according to Global Property Guide estimates) – an increase of only 18%.

Tallinn’s average rental yields have therefore fallen significantly, from around 8.47% to an average of 5.77%.

The figures in Latvia (5,04%) and Lithuania (4,39%) are even worse........

All yields figures are gross, i.e., before any costs, taxes, etc. These falling yields suggest trouble ahead

Western Europe
What about the West European countries in our table? Some also yield good rental incomes for residential investors, including France or the Netherlands (though at best they yield 2% - 4% less than the very highest yields Eastern European countries).

The problem is that they have quite substantial disadvantages as investment destinations: Western European property is expensive, in sq. m. terms.

The high yielding Western European countries have significantly lower real GDP growth (see GDP/cap Growth 5 Years) than their Eastern counterparts. Not just lower growth – dramatically lower growth.