Foreign banks threaten legal action against Polish forex loans bill

By bne IntelliNews August 25, 2015

bne IntelliNews -

 

As Poland's upper house of parliament prepares to vote on the bill, foreign banks have threatened legal action against proposed legislation that would see lenders forced to take huge losses on converting foreign exchange loans to zloty.

US giant General Electric (GE), owner of Bank BPH, said in an open letter to the Senate, published on the website of the upper house on August 25, that it will seek damages should the bill be passed in its current form. Germany’s Commerzbank, which controls mBank, has made a similar threat.

Both foreign companies claim that the bill would violate bilateral investment protection treaties between Poland and their home countries. The German bank also claims the bill runs counter to EU law and the Polish constitution. 

"The GE group intends to pursue full compensation for any damages caused by the approval and signing of this bill," GE Capital CEO Keith Sherin wrote to the Senate. 

The US conglomerate complained that the passage of the bill through the lower house had already "caused the value of BPH stock to fall close to 10%". Voting through the bill by the Senate would "inflict further harm, also in financial terms, on investments protected by bilaterial treaties," it added.

The National Bank of Poland warned in an opinion sent to the Senate in mid-August of "doubts regarding the constitutionality of the act's provisions". That could "create a risk of claims for compensation from banks and their investors at state treasury's cost," it added.

Commerzbank called on the central bank as a star witness in its letter. "[A]ccording to the National Bank of Poland," it wrote, "mortgages in foreign currencies do not create a systemic risk, therefore passing of the proposed bill is groundless."

Last-minute changes 

The bill, on which senators are due to vote in early September, allows for the conversion of foreign currency loans into zloty at market rates. The repayments of around 500,000 Polish mortgage borrowers rose dramatically in January after the value of the Swiss franc spiked.  

The resulting zloty loans after the conversion would then be compared with the burden on the borrower had the original loan been made in the local currency. The original bill from the ruling Civic Platform (PO) party had suggested lenders would take on 50% of the resulting loss, with borrowers to take the rest of the hit.

However, a last-minute amendment saw the banks marked down for 90% as the draft was passed by the lower house in July. The bill sent Polish banking stocks tumbling on August 6. PO officials, as well as the hawkish financial regulator KNF and central bank, have criticised the amended legislation. It is estimated it could cost the banking sector up to PLN22bn (€5.2bn). 

PO has pledged to get the bill returned to its original format. However, with the party trailing the populist Law and Justice (PiS) badly in the polls ahead of the parliamentary elections in October, it may not get the chance. Either way, Andrzej Duda, the new Polish president who ran on the PiS ticket, is unlikley to sign off on the legislation for the meantime.

Should PO pull out a surprise and retain power in the October elections, that could change late in the year, although without the pressure of an election the centre-right party would likely seek to water down the bill down. However, PiS has said it would look to force conversion of the loans at historic rates, with lenders warning that could hit them for PLN30bn-60bn.

While the banks have been holding out against taking on any of the losses – a stance harshly criticised by the authorities of all shapes and colours – the danger of a PiS solution has them singing a very different tune. In an apparent effort to help push through the lighter PO effort, Polish banking lobby ZBP on August 25 called for a return to the original draft legislation.

"We want the solutions to mitigate the consequences of temporary FX rate changes, but in a way which would allow the banking sector to remain stable and which would not significantly limit the capacity of financing the economy in the coming years," ZBP head Krzysztof Pietraszkiewicz said, according to PAP news agency.

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