SEBASTIAN VLĂDESCU'S SOLUTION TO THE CRISIS OF CHF DENOMINATED LOANS: "The discounts should be offered to the initial borrower of the bank, not to the debt collectors"

Recorded by ANCUŢA STANCIU (translated by Cosmin Ghidoveanu)
Ziarul BURSA #English Section / 12 mai 2015

"The discounts should be offered to the initial borrower of the bank, not to the debt collectors"

(Interview with Mr. Sebastian Vlădescu, former minister of Finance)

"BASEL 3 is a problem"

"Entrepreneurs are concerned by the lack of transparency of the stock market"

"It is a good thing to enjoy every year of peace we get"

Reporter: In the report about Romania, recently published, the International Monetary Fund states: "The legal risks remain a major problem for the banking system. A wave of recent lawsuits filed based on the Civil Code of Law passed in 2013, concerning the abusive clauses included in loan agreements, has led to the situation where the rulings of the lower courts are being challenged via appeal on claims of being against market practices. If those rulings become the basis for a «class action», they can represent a threat to the system. In response, the authorities have drawn up a plan to establish specialized courts to handle these cases. Still, the implementation of this plan has been delayed repeatedly due to administrative reasons". What is your opinion on these statements?

Sebastian Vlădescu: I think the observation of the IMF is correct.

If the lawsuits are won, then the banks will have to pay, and as a result, there would appear a risk for the banking system.

The fact that there is the desire to create specialized courts seems very adequate to me, because in doing so, this would ensure that the lawsuits are tried quickly, which is what everybody wants, but also more professionalism. There are quite solid specializations in the commercial economic area, and a specialization on banking cases doesn't seem inappropriate to me. It would ensure, from my point of view, more professionalism and higher speed in the resolution of the cases.

The International Monetary Fund, in its own manner, expresses the opinion that there is a risk for the domestic banking system.

Perhaps this risk should be sized - it means a few tens or hundred million Euros -, at any rate is it less important now, compared to the provisions already set up by the Romanian banking system up until this moment.

Reporter: But the courts have begun severing lawsuits, which makes it very difficult and expensive for debtors to participate in individual lawsuits ...

Sebastian Vlădescu: I am not an expert in law, I have not read the contracts of the CHF borrowers.

Tomorrow, this problem could move to the borrowers in dollars, and the day after tomorrow, to those in Euros.

In my opinion, people who took out loans for their first and only home should not be placed in the situation of losing it, even if that means a discount that needs to be borne by the banking system, by the state budget or anywhere else.

Reporter: There are currently 75,000 CHF loans, but there are also the loans sold by the banks to debt collection agencies. In total, there are approximately 200,000 CHF loans. If we make a simple calculation, by multiplying these 200,000 loans by two - husband and wife - we will see that approximately 400,000 employees are affected, in other words 10% of the total number of employees in Romania ...

Sebastian Vlădescu: No debt collection company bought the loan at the face value, they got it at a discount. In my opinion, the solution would be for those discounts to be granted to the initial customer, not to the debt collectors, and that is how that problem gets resolved.

The loan in question is no longer a risk for the banking sector, because it has been provisioned.

From that point on, we are entering an area similar to loan-sharking, and the state could intervene and tell debt collectors: if you bought the loan at 20% of its face value, you can't pressure the customer to give you more than 50% of the face value, or 30%, or 70%.

Reporter: Are the sales of performing loans legal? There are many cases where the banks sold their loans to third parties, a few days after they were contracted. They didn't even know whether they would perform or not.

Sebastian Vlădescu: That is not normal. If I have a contract with a certain entity that wants to terminate the agreement, the first person that needs to be notified is the customer, who signed that contract.

From that point of view, if banks have done something like that, they have to be held liable and pay.

The customer has signed a document with the bank, and the bank may not sell the contract to somebody else, and require the debtor to remain in a contract with another entity.

If the bank gets sold entirely, including with assets and liabilities, including those contracts, then that thing is legal.

Reporter: Analysts of the National Bank of Romania claim that debtors who borrowed in exotic currencies did not have financial education.

But loans in CHF have been borrowed in other countries in the EU as well - Hungary, Poland, Croatia - and the customers weren't just individuals, but local administrations as well ...

Sebastian Vlădescu: The lack of financial education isn't something that is confined to Romania, just as the lack of education, in general, isn't strictly limited to Romania. I don't think Romanians are less civilized than a Frenchman or a Hungarian.

But the lack of financial education is a reality and can be a systemic risk in any country. The advantage offered by the loans in CHF, at a certain time in the recent history of bank lending, is also a reality.

I can't quantify how much the low interests, the low fees and the lack of financial education accounted for in the decision to borrow in Swiss francs.

It is true that people did not take into account the currency risk at the time, which denotes the lack of financial education, but it is just as clear that the benefit provided by the low interest has compensated the taking of the risk in question.

It is a reality, however, that in Romania, there is a higher number of citizens that have a lower financial education than in other European countries. If you look at Romanians' rate of use of bank services, which is the lowest in Europe, then it is clear that we are facing a problem of financial education.

"Why would a Greek or Spaniard be required to give money to a Greek only for the latter to be living it up?"

Reporter: Will Greece stay in the Eurozone? An increasing number of analysts claim that we will witness Greece's exit from the Eurozone, one way or another ...

Sebastian Vlădescu: My opinion is that, for Greeks, the exit from the Eurozone would be far more expensive than staying in it.

It is very easy for the current Greek government to say it would pay the thirteenth pension, like it has promised in the electoral campaign.

But the Greek officials don't know where to get that money.

Reporter: They have taken one step. They have forced the institutions of the state to transfer their cash reserves to the Central Bank to pay the salaries of the public employees.

Sebastian Vlădescu: That decision rather shows desperation, it is not something that has to do with the normal functioning of the economy.

Reporter: If they were desperate, they would start making reforms.

Sebastian Vlădescu: That is the problem of talkative politicians, that have nothing consistent behind them.

In times of crisis, the peoples are very open to that type of politician.

Remember that in 2012, in the Romanian elections, there was a party that had no connection whatsoever with normal policy and which, based on wacky statements on TV and in the media, raised a consistent number of votes in the Parliament, more than 10%.

Since then, I don't know if the party in question still exists, but at the time of those elections, there were hundreds of thousands of people that voted with that political party.

Now, in Greece, after six years of restrictions and reshuffling of budget expenses, the elections have been won by a party that made many promises, some realistic, some less so. But once you get the government, it becomes very hard to keep your promise, because you need money.

The Greeks aren't to happy with paying taxes, but they do want to receive pensions, bonuses, and so on.

After all is said and done, Greece needs to adapt and spend as much as it is earning.

Why should a German or a Spaniard pay money to a Greek for the latter to live better?

Greeks aren't like the children in Sudan or Somalia that are starving to death. Over there, you could say that there is a moral obligation, because we are talking about children that have some basic needs.

In fact, the Greeks are in the situation where, between May and October, tourism and summer parties begin.

They need to deal with their internal issues, within the country, in terms of the GDP, of budget earnings, of eliminating tax evasion, of paying taxes.

I've heard in Greece phrases like: "I have my own restaurant and the government comes up and asks me to pay taxes".

We can go back to a state where nobody pays any taxes, no one provides any services to citizens and everybody has to get by on their own the best they can.

There is this hyper-neo-extra-liberal opinion.

Reporter: But Greeks aren't used to paying taxes. We are talking about changing a mentality, which can take generations.

Sebastian Vlădescu: And who is going to pay the salaries of the Greek civil servants? The Germans?

Creditors are telling Greeks that they need to come up with a solution themselves, obviously with the help of the international institutions.

The international financial institutions do not agree with the idea of the Greek government that there is no solution and that they have to continue with the way things are now.

The Greeks have reached a debt that amounts to 176% of the GDP. We know that if it continues like this, they will get to 350%, in ten years, but they don't want to change their lifestyle. The Germans, the Dutch or the Austrians won't accept that, because they have to send them 20 billion Euros a year to help them live like this.

Reporter: Greeks aren't going to change so quickly...

Sebastian Vlădescu: Regardless of how stubborn they may be, they are going to realize that between the risk of remaining with themselves and the risk of having some kind of support, the former is higher than the latter.

Reporter: They are probably relying on the fact that if they go into default, there is the risk of other states going down as well.

Sebastian Vlădescu: We know very well that is not the case.

Instead of endlessly giving Greece money, the European authorities would prefer injecting 100 more billion Euros in the fund for the support of the European banks - French, German and Italian -. The European Central Bank will take over the Greek shares that they have in those banks in their portfolios and no one else will go into default.

And as a result, the European Central Bank will have another 100 billion worth of junk. Considering what it's got already, what does it matter?!

In the end, the Greeks need to understand that there are limits.

Reporter: Why does the ECB increase the emergency funding of the Greek banks? What does it mean?

Sebastian Vlădescu: There has been a financing for the Greek banks, which need constant liquidity because there are massive withdrawals by depositors. The ECB is compensating for the withdrawals in Greece.

Reporter: How will the Romanian banking system be affected, in the event of a Greek default?

Sebastian Vlădescu: On principle, the action of the NBR will prevent the banks from losing their liquidity. By not losing their liquidity, the banks will be the same institutions. Furthermore, it's been a long time now that Romanian banks with Greek shareholders have stopped receiving money from Greece.

Reporter: But people will not be depositing their money with them.

Sebastian Vlădescu: That is a different issue. Some banks will disappear, it is not that serious, because we have 40 banks. It is not a tragedy if one, two or three banks disappear. The Romanian banking sector has a surplus of liquidity.

Whatever bank left, its place would soon be taken by another. If the Romanian banking sector did not have liquidity, then there would be a problem, but the fact that the people's money gets moved from a bank with Greek shareholders to one with Romanian or Austrian shareholders does not create problems within the system.

Reporter: The National Bank of Romania recently decided on a measure that has never been seen before in the Romanian banking system - it has asked Romanian banks with Greek capital to conclude a compensation agreement with their shareholders, that would not allow the latter to withdraw their deposits from Romania, in the event of capital controls. What do you think of this measure?

Sebastian Vlădescu: It is very good.

The National Bank is not really capable of blocking loan agreements between the parent bank and its Romanian subsidiary. But it can intervene if the bank in question falls below the limits set by the Central Bank for the various solvency parameters. And as for the money that comes from deposits set up in Romania, the NBR can prohibit the confiscation of the money therein. In my opinion, it is a very good decision for the safety of Romanian depositors that have their money in Greek owned banks.

Reporter: The vicepresident of the ECB said that Greece's default does not mean the exit from the Eurozone. Can Greece stay in the Eurozone even in the event of a default?

Sebastian Vlădescu: The Euro is first of all, a political tool. It is not inherent that a state in the Eurozone can't enter default. It would be worth studying what the impact of a default in a Eurozone country would be, concerning the other member states.

Personally, I think that the impact on Germany would be different than the impact on Greece. The impact is in line with the country's relevance on the GDP of the Euro.

If the European Union were a deeper politically than it is now, Greece's default would be less dangerous than California's default was.

15 years ago, when California's default was being discussed, it was also a matter of tens of billions of dollars.

Has California disappeared, did you hear anything dramatic in the interim?!

Reporter: But perhaps these things have led to the current situation of the economic crisis?

Sebastian Vlădescu: I think that in fact, consumption that exceeds production and the creation of artificial, virtual money, have created the crisis that we are in.

This is a thing that we already know and which is accepted. The solution for the rescue - quantitative easing - was a strange one, to avoid calling it something else. Even though we have found that we have a general problem caused by excess credit, we are creating more liquidity.

We are moving money volumes from one zone to another, but we are creating more liquidity, we are assuaging the crisis for the time being and we are waiting to see what will happen.

That is where we are now.

We don't know what will happen.

I think that the economic paradigm will be written by the post-crisis economists.

Reporter: Will the world leave the crisis?

Sebastian Vlădescu: The world is not in a crisis, a growth of more than 3% globally, as has been happening for many years now, can't be considered a situation of crisis.

Several hundred million people going from absolute poverty to "poor but fed", shows that we are not actually having a planetary crisis.

In the end, the crisis is a very individual, personal notion, and which, on a mental, social, general, level, can be induced.

In Romania today, the crisis is far less severe than it was in 2010, but the global psyche tells us that it is worse. If we calculate certain parameters, we will see that the wealth per citizen or per family is progressing, but on a perception level, everybody says that we are in a crisis and that it is getting increasingly worse.

This is a new world, that is rebuilding itself.

What I want is for it to rebuild itself in circumstances of peace.

The differences between the current grave, real Western crisis and war are so big that I for one say that we should enjoy every year of peace that we are getting now.

Reporter: Will we have war?

Sebastian Vlădescu: 85% no, 15% yes.

Currently there is all over the world a level of tension that can escalate into a war.

The question is whether we are going to have war in Romania, in relation to that 15% mentioned above, I think that the chances are 75% "no" and 25% "yes".

If that 15% happens, the probability of Romania being engaged is higher than that of other countries.

I see Argentina or Indonesia less likely to be involved in a war than Romania.

Reporter: Analysts are saying that quantitative easing would lead to the creation of a new bubble.

Sebastian Vlădescu: This is a formula for postponement, not for resolution.

A crisis of excessive lending has been created, a palliative has been found, the crisis in question has not been resolved.

Reporter: Why isn't the increase in money supply generating inflation?

Sebastian Vlădescu: In my opinion, the hyperinflation process exists, it's just that it doesn't exist in the area where inflation indicators exist, rather it exists on goods and services, where they aren't calculated, such as for instance, the stock market, the luxury goods market ...

When something rises 20% a year constantly, without the economic parameters of the companies in question evolving, then you have a bubble.

I don't think anybody has any doubts that at the present time, a bubble is being created.

Reporter: But what is the solution?

Sebastian Vlădescu: The moment a bubble bursts, some people lose money, which cleans up some of the excessive liquidity.

We don't know which level the stability gets rebuilt on, how much ordinary citizens are affected.

If the collapse of the stock market doesn't reduce the flow of goods and services, then things could operate without problems.

If plants start shutting down and unemployment shows up, then we have a problem.

"Better prudential and capital rules for banks are absolutely necessary"

Reporter: What is your opinion on BASEL 3?

Sebastian Vlădescu: BASEL 3 is both necessary and a problem.

Had it been implemented 25 years ago, BASEL 3 would have helped avoid the current situation.

Better prudentiality and capital regulations are useful.

The separation between the various types of activities that banks conduct, moving investment banks into an area where those who are interested know exactly what risks they are talking about, as well not mixing them in with commercial banks represents a useful action.

The move from the situation things have come to a state of normalcy will be complex, complicated and painful.

Reporter: Painful for whom?

Sebastian Vlădescu: First of all for banks.

Reporter: Is the notion of bank changing?

Sebastian Vlădescu: Not necessarily. There is a return to a more classic model of bank, in which the banking activity is less risky than that of investment banks.

Reporter: How safe is it to keep your money in the bank?

Sebastian Vlădescu: There is a dose of risk.

Reporter: Higher or lower than before?

Sebastian Vlădescu: Higher.

Reporter: What about depositing the money in Romanian banks?

Sebastian Vlădescu: I don't currently see a risk in that.

I don't think there is currently a bank in Romania that would have a risk that goes toward 50%, we can say it is somewhere near 2-3-5%.

Reporter: Is the fact that people no longer trust banks an opportunity for the stock market?

Sebastian Vlădescu: It could be.

The problem is who invests in the stock market.

Turning from a passive depositor to an active investor is not a simple process, because it involves several types of actions, education and trust.

When you place your money into a bank deposit, at least on a declarative level, you have a guarantee.

When you place the money in a brokerage firm's account and then you read the newspapers, you always have a doubt that is not offset as solidly by the potential gains.

Sausage maker or not, like the stock market people call me, I think that the main players that have to change the stock market are the brokers.

They have to build the people's trust in the stock market.

There are entrepreneurs who are scared of the stock market and not because of fear of being transparent.

In fact, they are scared by the opaque manner in which the stock market operators.

Reporter: What do you mean?

Sebastian Vlădescu: Inside trading, manipulation, inconsistency.

These things scare people that want to raise financing through the stock market, not the fact that they would have to send in all the information about the company once every three months.

They are giving those numbers to banks to raise financing anyway.

No one gets scared of transparency anymore.

Any company that is just a little consistent, serious, is required to be transparent, especially if it wants to grow.

Reporter: Thank you!

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