Between a rock and a hard place

These times are joyless, so let me start with a joke. Once upon a time there lived Bank that had three cash machines. Two of them were smart but the third one was stupid because it kept giving cash.

Not funny? So your money deposed in a bank is still trying to work for the Ukrainian economy while you can’t withdraw any from your account.

There is the other side to this joke. People fell into a trap by having taken out bank loans in dollars and now being unable to pay on them because of the plummeting hryvnia exchange rate. These people risk losing their homes and cars. Everyone is suffering under the circumstances, including the banks that have found themselves between a rock and a hard place.

The two categories of bank customers mentioned above play the role of this rock and the hard place, although the borrowers have turned out to be better organized. On February 23 they held an all-Ukrainian rally in front of the National Bank, government building, and Presidential Secretariat. Their main demand was a mechanism to protect their interests. They will possibly be joined by depositors and pensioners who now have a hard time trying to withdraw money from their bank accounts. How will these two categories of citizens that turned out to be the first victims of the financial crisis coordinate their obviously polarized interests?

The only thing that unites them is the counterproductive motto “Down with Everyone!” If the National Bank and the commercial banks sign the memorandum demanded by the borrowers and proceed to implement it, preserving the status quo at the time of signing loan agreements (including exchange rates, commission fees, and interest rates), what will the depositors do?

One of the rally organizers noted that “from Lviv to Donetsk, the number of organizations that want to simultaneously protect their interests is increasing.” In other words, the situation is escalating. Meanwhile, word is spreading that the dollar/hryvnia rate may reach 1/10 shortly. One can call these rumors into question, but there seems to be no getting away from it for the Ukrainian in the street? Only those who, contrary to repeated appeals, refused to place their dollars on bank deposit accounts will benefit from this. All the rest, including those who placed their hard currency savings on such accounts and are now unable to withdraw them, have every reason for anxiety. If their banks crash, they will kiss good-bye to their money.

Can the state continue to pretend that it has nothing to do with this crisis, saying that all have been duly warned about the risks involved in the Ukrainian banking, currency, and financial sector, and that it is high time Ukrainian citizens learned to assume responsibility for their choices, because no one has ever forced them to take out bank loans or open deposit accounts? This approach looks very cynical even if one does not take into account that our bureaucrats indirectly urge people to trust banks and keep their hryvnia and hard currency savings there, while, on the one hand, the government makes obvious raids on separate banks and the banking system in general. These raids have led to the destruction of public trust in banks, something that had been built the hard way. This is the biggest and most dangerous mistake made by the government. Attacking the banking system is like biting the hand that feeds you.

Is there a way to correct the situation? Certainly. One must not give up trying, but the first step the government should take is to stop and even repudiate any negative remarks made regarding any components of the banking system. Pensioners should not be advised to bring their money exclusively to government-run banks — there are only two such banks in Ukraine. City authorities should not be forbidden to have accounts in commercial banks. Portraying certain commercial banks as enemies of the people is a crime. Making such decisions does not require any calculations — anyone with enough common sense would make them. Such measures are badly needed today, yet they are absolutely insufficient. The government, the National Bank, and the commercial banks must offer a solution to the people, before the red or black broom, which can now be seen on the Maidan, becomes a symbol of our society. Otherwise decisions will have to be made in a hurry and under pressure from various kinds of populists, and the likelihood of mistakes with unpredictable consequences will dramatically increase.

One ought to give the banking system credit for not waiting for the H-hour. The Day has familiarized itself with an analytic document that considers various options of stabilizing the situation with the financial sector. It considers the possibility of converting the debts of individuals and legal entities (this option has been used by Argentina and Hungary) to prevent an avalanche of non-payments on credits. The authors of this memorandum believe that Hungary’s experience is comes closest to Ukraine’s, considering that in Hungary hard currency loans can be converted, at the customer’s request, into national currency loans. However, the new interest rates are set at a level that is equal or higher than what it used to be. It is suggested that the government should give preferential treatment to the banks that have undertaken conversion — particularly in terms of capitalization and refinancing. Both banks and borrowers are motivated to accept this decision. The borrowers are because they may otherwise find themselves unable to pay their debts, while for the banks conversion is a more than acceptable alternative to default.

The question is what exchange rate should be set for such conversion. Today’s picketers demand that the amounts in dollars they borrowed previously be converted into the national currency at their value at the time: the ill-famed 5.05 exchange rate. This solution appears totally unacceptable to the banks because it will not save them from default, but will outrage the depositors.

The government’s point of view was rejected by parliament when it considered the bill “On Introducing Amendments to the Law of Ukraine ‘On Company Income Tax’.” The government argued that the borrower has the right to pay on a loan at the exchange rate agreed upon by the parties provided it is not lower than the official exchange rate effective on the date of the loan agreement. The authors of the memorandum note that the special feature of the bill was “obtaining fiscal benefits from transactions by the state, rather than effective aid to the banks.” (Regrettably, no mention is made of the borrowers.)

What is the point of these proposals that are, as yet, unofficial? It is proposed to work out a conversion program that would be optional for individuals, who are exposed to the crisis the most, and legal entities, and would be based on switching from a floating to a fixed interest rate that was valid on the date of conversion. According to the authors of the memorandum, the banks must absorb part of the losses resulting from the conversion, but these losses must not exceed the potential losses caused from the borrowers’ possible mass insolvency.

In a word, this option can hardly be described as most favorable for those picketing government institutions. Hopefully, it can save them, the banking system, and the entire country.

Roman Syrotian, an analyst with the Sokrat investment and finance group, told The Day that no bank will convert loans at the exchange rate of 5.05, just as no bank will bear all the losses. They might make some concessions to the borrowers (in fact, this is happening on an increasing scale), but they cannot allow any damage to be done to their loan capital, i.e., their depositors.

Indeed, can our banking system retreat any further, considering the losses it has already sustained in terms of finances and reputation, losses that are hard to make up for? It is meant to cater not only to borrowers but also to industries, agriculture, and all citizens, including those who have entrusted it with their money. Therefore, it must be healthy, avoid excessive risks, and enjoy public trust.