Ukraine MPs adopt populist law targeting banks

The Ukrainian parliament adopted a bill obliging the country’s banks to convert foreign currency-denominated retail loans into hryvnias at the exchange rate on the date of the loan issue. The legislation earned 229 votes (of 226 needed) in the late evening of July 2. It obliges the banks to convert the foreign-currency loans at a borrower’s request. The banks will be also obliged to take back the collateral on the loans, if a borrower demands so, and will be prohibited to claim the difference between borrower’s obligation and the value of the collateral.

Most of the foreign-currency loans to individuals were issued by the banks in 2006-2008, when the exchange rate was UAH 5.05/USD. Foreign-currency loans (especially mortgages) were attractive due to their low interest rate, as compared to hryvnia- denominated loans. Since then, the hryvnia has devalued 75%, which increased the debt burden of borrowers, in the UAH equivalent, by four times. Since most of the borrowers generate their incomes in the local currency, the loan burden became too heavy for most. The more aggressive borrowers have been since been protesting and demanding the adoption of such a law.

State financial officials, the central bank and civic activists heavily criticized the adoption of such a bill last night. Finance Minister Natalie Jaresko estimated UAH 95 bln in losses to Ukraine’s banking system if the loans are converted, which exceeds state budget spending for defense and law enforcement in 2015, based on her estimate. The central bank (NBU) confirmed Jaresko’s claims in an urgent press release, offering its own estimate of banking sector losses at about UAH 100 bln. The bill not only violates national legislation, but also commitments that Ukraine took to the IMF, the NBU reported.

Interestingly, many MPs that voted in favor have “changed” their position overnight, promising either to “recall” their votes or demanding further discussion of this issue. The deputy head of the pro-presidential faction in parliament, Ihor Kononenko, assured the public the president would veto this bill.

The net amount of outstanding foreign-currency loans to individuals was UAH 60.3 bln (USD 2.6 bln) in the Ukrainian banking system as of end-1Q15. 73% of them were held by the top 14 banks, including 25% by UniCredit’s Ukrsotsbank (USCB UK).

Alexander Paraschiy: We are sure the president will veto this bill as it has little to do with common sense and, more importantly, will spoil Ukraine’s relationships with the IMF. At this stage, even populists have understood that such law is not popular in society. In and of itself, the idea is ridiculous that all taxpayers should compensate the losses of those who chose low-interest loans a decade ago by ignoring the devaluation risk that were built into the low cost of loans.