Florin Citu, financial analyst
The deals are usually closed after signing long contracts and often involve teams of lawyers. Even the financial market deals, which are closed instantly, are based on contracts signed after long partner-evaluation procedures.
The 2004-2008 economic boom created in Romania the necessary conditions for the financial market’s development. At the beginning, everything went slower, as neither the banks nor the clients hurried to sign the contracts at short notice. But, in time, both clients’ impatience and the banks’ wish to issue as many loans as possible significantly reduced the “tapping” period. As a result, the prior analysis on the behalf of both parties became more and more succinct. Under these circumstances, it was just normal that when a recession happens (it can take place very 4-5 years) there will be some problems. And the problems appeared indeed and the community noticed, at that point, that solutions to these problems were different for banks and for their customers.
If the banks had the insolvency law or government money lent with preferential interests, the customers had nothing to attenuate, for example, becoming unemployed due to the crisis. The regulator was concerned to build safety nets only for those regulated and didn’t do it for the beneficiaries of the market regulation. Despite the fact the banks’ customers were those who should benefit of the market regulation and who commissioned the National Bank to do it in their name.
Since 2010, the banking system faced two big problems in. Real problems for the clients, image problems for the banks: the abusive clauses and the foreign currency loans. Romania is not the sole country with such problems. Spain is a country where ten types of abusive contracts were spotted in the loan credits, and the Central Europe countries currently try to find solutions for the foreign currency loans.
First at all, for a capitalist system (in its incipient stage, that’s correct), the bank market situation is complicated by the fact the disputed contracts were signed by both parties. In theory, we should find no sympathy for the banks’ customers that are now complaining about the way they are treated. In fact, Mugur Isarescu, who was recently re-appointed as the Governor of Romanian central bank, had the same opinion on 7 August 2013: “The abusive clauses or the non-abusive clauses are all part of contracts that people signed when they received loans. In a state of law, when you sign something you are responsible for what you have signed.”
As I said, Governor Mugur Isarescu is theoretically right. In a market economy, when you sign a contract you are responsible – my word is my bond. However, some citizens felt the information they were given before signing those contracts was not complete. For example, maybe they didn’t understand, because nobody told them, that the foreign exchange market has several exchange rates. Or that there is a difference between the exchange rate a bank uses for selling currencies and the one used for buying currencies. So that, after a while, some clients went to court complaining about the initial provisions of the loan contracts.
Almost simultaneously, the National Bank (the financial market regulator, the one that should protect the consumers’ interests) warned, through its governor Mugur Isarescu, that a central bank’s analysis indicated the lawsuits regarding the abusive clauses might lead to billions in losses for the banking system. They went so far that they even postponed twice the date when the new Civil Code was to become effective in order to help the banks. Meanwhile, we found out that the said analysis never existed, the Civil Code became effective and the bank’s losses the National Bank was warning about never became true.
In fact, a better question is: why all this cheap show staged by the National Bank? Especially as, on 30 September 2014, Mugur Isarescu was saying: “The abusive clauses are an issue. So where we encounter special cases -we can’t generalize- when a client or a group of clients were deceived through proven actions, so the so-called abusive clauses, there is a law, and it’s not a new law, which is enforced.”
So, today we know there are abusive clauses in some contracts. We know that some banks used the fact the majority of their customers didn’t understand what exchange risk or interest risk meant. And, in the same time, we know that eliminating those clauses from the contracts didn’t destroy the banking system. On the contrary, I’d say, it actually put it on a more solid foundation for the next developing cycle.
The new dispute: the CHF credits
However, these days the disputes between the banks and the clients are going on regarding the exchange rate for the Swiss francs (and other foreign currencies) loans. The same as for the abusive clauses, I don’t have the contract details. So I’ll only have a look at the principles. But, once again, the central bank has an opinion that is shared by Mugur Isarescu: “We are talking about a contract signed by two conscious parties. I believe both the lender and the borrower were conscious when they signed.”
But what are we talking about, in fact, in both cases? We are talking about risks and about who takes them. Are the risks asymmetrically distributed between the client and the bank? If so, are the clients aware of this? Do the contracts clearly indicate how do the risks distribute in case they come true? Did the central bank asked for this level of transparency in the contracts?
A floating interest loan brings the risk of an increasing interest rate. A foreign currency loan brings the risk the national currency depreciates. We will never know to correctly estimate the future evolution of these variables. It’s hard to do it on short term and impossible to do it on long term. For example, Mugur Isarescu was saying in September 2008 about the 2008 and 2009 economy: “I believe we will have economic growth in Romania in the coming years. Of course, an economic growth closer to the potential, which was estimated by the National Bank’s experts at 6% per year. It’s true that, as the world economic activities have reduced, especially in the European Union, which is our main export market, the economic growth might be under 6%. But, without doubt, there is a whole series of factors that will impact over the next year’s growth, placing it above or below the 6% level: the oil price evolution, the quality of the crops, amplifying the efforts for developing the infrastructure but also those for increasing the labour productivity, the volume of the foreign investments etc. Anyway, an economic growth of 6% in such conditions is a remarkable performance. Which doesn’t mean that we won’t hear some analysts saying, in case the GDP growth rate will drop from 9% to 6%, that the growth rate collapsed by 33%…”
Now we know that 2009 was the more difficult year of the economic crisis. So, if Mugur Isarescu, from his position, missed the target by 12 percentage points when estimating the next year’s economic growth, what can we expect from the estimates of the interest rates or the exchange rates for a 30-year period? More, the same Mugur Isarescu was recently saying that the banks make mistakes too when investing and not getting back the expected yield.
Only that, as I mentioned before, the banks have both an insolvency law protecting them from creditors and government money. So far, the National Bank wasn’t willing to offer the same conditions to banks and their clients. Until this very moment, the central bank opposes a personal bankruptcy law.
But the banks know very well that it’s impossible to make correct estimates for a 30-year period. The banks use scenarios. So they offer the companies or the states, along credits, products that cover the exchange rate, interest rate or market risks. This way, the negative exchange rate or interest rate fluctuations don’t catch the states or the companies unprepared. Not all of them buy such products and we know this as many Romanian companies lost a lot of money when the interest rates surprisingly increased in October 2008. But all of them had the option to buy insurance. Unfortunately, some didn’t.
For the physical persons, there are available no instruments for reducing the risk or personal bankruptcy law. This is where the regulator should use its prerogatives. It should at least ask the banks why they don’t offer such products. It was also normal to ask the banks for risk scenarios, to see if the banking system can survive in case the interest rate and exchange rate come true and their clients have no coverage. But nobody wanted to know anything, because everybody was thinking in the short term and, as we saw, everybody, including Isarescu, only had in mind the best case scenario.
The most surprising thing for me is the way the financial market regulator reacted in both cases. Especially that we all know now those abusive clauses were part of the contracts. More than that, we have clear examples from Spain and Hungary. I was expecting the regulator to ask for more transparency. For example, to tell people, when they sign a loan contract, there are chances to lose their job at least four times in the next 30 years. Or ask the banks to find solutions, not free, of course, to cover these risks in the future (why not fixed interest rates?). Or try to balance the relationship between the creditors and the debtors, by promoting a personal bankruptcy law. And the most important thing that had to be made was to eliminate the financial market entrance and exit barriers, in order to offer the consumers more options and to decrease the operational costs.
Instead, the regulator is publicly supporting those he is regulating. It’s awkward, as the beneficiaries of the regulation policies and those who commissioned the central bank to regulate the financial market are the consumers. If the National Bank wants to take sides, it should take the consumers’ part. What it does now it’s called crony capitalism.