Ukraine to lose 100 billion hryvnias if foreign currency loan restructuring adopted – Ukrainian bankers

Ukraine to lose 100 billion hryvnias if foreign currency loan restructuring adopted – Ukrainian bankers
July 03, 2015.

Kyiv, July 3, 2015. Members of the Parliament approved a populist law, No. 1558-1 on foreign currency loan restructuring that threatens the entire Ukrainian economy, said concerned Ukrainian bankers at a press briefing at Ukraine Crisis Media Center (UCMC). The briefing is part of UCMC’s Ukraine Reforms Communications Taskforce project.

On July 2, the Verkhovna Rada passed the bill, forcing commercial banks to use an exchange rate of 5.05 UAH to 1 USD for consumer and mortgage loans from 2007-2009. Shortly after 229 MPs voted in favor of the bill, some withdrew their votes, saying they did not understand the law in question. The document originally went to the parliament for review after people took to the streets when they could no longer pay their debts due to the hryvnia’s swift depreciation.

Bankers at the briefing were adamant that the move would lead the country in the wrong direction saying, “According to our assessment, Ukraine would lose at the very least 95 billion hryvnia as a result of this law. This figure does not include additional losses the market would incur when banks become insolvent, as well as transferring them to the Deposit Insurance Fund, which is likely if the law takes effect. It means reduction of social welfare payments, since these funds would be directed to repay deposits guaranteed by the law,” said Viktor Novikov, Member of the Board of the National Bank of Ukraine (NBU).

Olena Korobkova, CEO of Ukrainian Banks Independent Association (UBIA) said that by UBIA evaluations, annual banking system losses due to Parliament’s decision will cost 2 billion hryvnia in addition to the aforementioned 95 billion. She added that rapid depreciation of the hryvnia would likely be the law’s most painful outcome for the public. “The exchange rate will be some 40 or maybe 50 hryvnias per 1 USD, and if all the banks enter the interbank market to satisfy depositors’ demands, everyone will feel it,” stated Korobkova.

Speakers said that even the concept of Law No.1558-1 undermines trust in the banking system, as it will hurt honest borrowers and offer them less protection. It also contradicts agreements reached between Ukraine and the International Monetary Fund recorded in the Memorandum on Economic and Financial Policy, which clearly envisages a borrower-bank relationship that remains independent from the government, in compliance with international practice.

Furthermore, Novikov explained that the National Bank offered alternatives to the law as early as August 2014, but that the parliament did not support the corresponding legislative initiatives. Instead, bill No.1558-1 appeared before proper discussion could take place.

Andriy Dubas, secretary of the Civil Council for the Security Service of Ukraine, said that borrowers who are trapped due to the hryvnia’s rapid depreciation have a potential alternative. He explained that borrowers could restructure their loans on standard conditions stipulated by a memo that the majority of banks approved. “Apart from the rest, the Memo defines a separate category of socially unprotected people who are given an opportunity to receive benefits while restructuring their debt in the form of partial debt relief,” Dubas added.

According to Taras Kachka, Head of Ukraine Reforms Communications Taskforce, the approach outlined by Dubas is an example of a reform because all members of the market reached an agreement on a joint solution to the crisis. He explained that it is not necessary to wait for a legislative solution if members can create solutions. “Reforms don’t necessarily have to be implemented through laws or resolutions. There are instruments providing a possibility to proceed by making individual decisions without any legislative interference. The main objective is to solve a problem. We have to involve all the resources to renew trust in the banking system,” summarized Kachka.

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