Swiss franc surge hits emerging Europe bank sector

Debtors in Poland left with sky-rocketing loans after the Swiss central bank’s surprise move to let the franc surge, sending shock waves through the banking sector in central and eastern Europe.

WARSAW, POLAND (JANUARY 16, 2015) (REUTERS) – The Swiss central bank’s surprise move to let the franc surge sent shock waves through the banking sector in central and eastern Europe (CEE), where widespread mortgages denominated in francs suddenly became much harder to service.

Analysts said Poland looked especially exposed to the currency swing that could boost bad loans and poses a policy headache for governments watching citizens’ purchasing power dwindle.

FX-borrowers in Poland were left with loans that sometimes more than doubled in value.

“The property I own is worth 250 thousand zloty and the loan I have to pay off for now is (worth) 550 thousand zloty. I already paid back 100 thousand,” said Violetta Gorgol, who took out a loan in 2006, when the rate of the Swiss franc to the zloty was 2,6.

“The trap was in the fact that Swiss franc allowed you to take a higher loan than the zloty, because the credit rating was calculated in a different way,” she said, adding that her bank insisted on offering her a loan in the Swiss currency.

Another CEE country affected by the surge, Hungary, already got ahead of the curve last year by fixing exchange rates for many borrowers who had taken out mortgages in Swiss francs to capitalise on low interest rates, only to lose out when the franc surged during the financial crisis.

The banks that issued those loans had to pick up the bill for fixing the rates, but a Hungarian market source said they were safe too because they had already converted their Swiss francs into forints last year and closed their positions.

Similar ideas had circulated in Poland but were never formed into concrete legal proposals.

“By taking an FX loan, we agree to a certain risk. Those 560 thousand people have taken this risk, they agreed to it. They paid very low installments for a few years, later is wasn’t so bad either and now the worse times have arrived,” said real estate market analyst, Marcin Krason.

“It is not in the interest of the bank to dispossess the flat owner, take over the flat and auction it; this is not profitable for the bank. Banks do it very seldom, they prefer for the debtor to pay off the loan,” Krason added.

Analysts say it is impossible to assess the impact of the Swiss franc strengthening on banks at the moment, but shares in Polish banks led Warsaw bourse decliners immediately after the SNB move.

The chief executive of mBank, Cezary Stypulkowski, told reporters there is no reason to worry about Polish banks and that the situation would stabilise soon.

Several banking sources in Warsaw said that there may be pressure now on the government to introduce a relief scheme for borrowers of Swiss franc mortgages.

Opposition party MP Pawel Szalamacha said his party would like to introduce a similar scheme to the one introduced by Hungary, but the government has remained silent on the matter.

“The banking sector, the financiers would like nothing to happen, for people to pay back the loans with the exchange rate 4,2 or 4,5, for the financial sector to gain that higher profit, that rain of gold,” Szalamach told Reuters.

“Our proposal is to give to those people the possibility to repay the loan recalculated according to the exchange rate from January 14, 2015 – from the day before the so called earthquake, which was the decision of central bank of Switzerland,” he added.

Hardship for borrowers could turn into a political issue in a year when Poland is to vote in presidential and parliamentary elections.

In Austria, Swiss franc loans made up 96 percent of the 25.7 billion euros (19.73 billion pounds) in foreign-currency loans households held at the end of September, posing a problem for lenders like Erste, Raiffeisen and Bank Austria. Regulators banned the issue of such loans in 2008.

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