bne IntelliNews -
Poland could force its banks to shoulder huge losses on foreign currency loans, the prime minister said on January 26, as the government juggles a political hot potato ahead of elections in the autumn. The path that Warsaw looks set to tread is becoming well worn.
With 500,000 Polish households exposed to the recent steep rise in the Swiss franc, the government is seeking a swift response. Prime Minister Ewa Kopacz told Polskie Radio that a currency conversion will probably be among the list of government proposals to be presented on January 28.
The Swiss National Bank (SNB) shocked global markets on January 15 when it removed the cap on the Swiss franc to the euro. The central bank also slashed rates to -0.75% as it bid to outrun an expected inflow of speculative capital on the back of the launch of the European Central Bank's quantitative easing programme, which was announced on January 22.
"If I have to choose between the interests of banks and of ordinary borrowers, I'll side with the people, but it will be the banks that foot the bill, not the state budget," Kopacz insisted. "I will make every effort to ensure these measures take effect as soon as possible and not in three or four months, because peoples' lives depend on them."
The PM's words will disappoint the country's lenders. After meeting with Finance Minister Mateusz Szczurek, governor of the Polish central bank Marek Belka and the financial markets regulator KNF, the banks pledged their own measures on January 23 in a bid to stem tougher action by the government. The authorities have meanwhile ordered a probe into the behaviour of the banks.
The Polish Banking Union (ZBP) said its proposals should considerably limit the effects of the Swiss franc hike. The package includes passing on negative CHF/Libor rates, lowering spreads between the Polish zloty and Swiss franc, and extending repayment periods. The lobby group also pledged to ask lenders to agree to give up plans to ask for additional collateral.
All major banks with Swiss franc mortgages in their portfolio have reportedly agreed to pass on the negative CHF/Libor rate. A number has so far pledged to lower spreads. PKO BP, the country's biggest, will slash the spread it uses to 1%.
Brass in pocket
However, facing a closely-run election against the populist Law and Justice party due by October, the governing centre-right Civic Platform clearly feels it needs to be seen to be on the side of borrowers. Kopacz insisted on January 26 that her government would resist populist spending ahead of the election, but analysts say someone will have to put their hand in their pocket.
The rising pressure on the banks comes in the wake of a climbdown on the restructuring of the struggling coal industry. In the face of protests from the country's 100,000 miners, the original plan – set to cost the government PLN2bn with the closure of four mines – was scrapped in mid-January.
The new scheme is estimated to inflate the cost to the state purse by no more than PLN800,000, but Poland's large state-controlled utilities will be put in harness to absorb what are likely to be much larger losses.
Warsaw has pledged to escape the EU's excessive deficit procedure this year by pulling its budget gap below 3%, and so won't want to shell out to support miners or borrowers. However, an expected close election means it must find someone to do so. Indeed, social groups have come up with demands that could cost the state coffers as much as PLN36bn (€8.5bn), Rzeczpospolita reports, and the PM admits that the pressure for raised government spending is only expected to rise.
However, the PM declared that the government will not free up the purse strings to buy off voters. That looks to leave the banks in a precarious position.
Led down the path
Poland's path is somewhat set by moves in other countries hit by the rise in the Swiss franc. The overarching strategy appears to be the one followed by Hungary, which escaped the mess by the skin of its teeth after the forced conversion of forex loans in late 2014. Polish officials and others are reported to have requested details of the Hungarian scheme since the Swiss franc crisis hit in mid-January.
However, Hungarian Prime Minister Viktor Orban's drive has seen bank lending dry up, leaving the central bank as the main provider of credit to the economy, while foreign investment has dropped off. On top of that, the Hungarian scheme was one of several over the past few years, meaning that some of the stock of debt had already been unwound.
It also means the market had seen the banks go through years of wrangling to absorb the effort. A sudden similar move in Poland to force a conversion along the same lines would likely cause a huge shock. Polish bank shares were hit hard following the SNB's move, causing the Warsaw Stock Exchange to move sharply lower.
In afternoon trade of January 26, the country's biggest bank, PKO, was 10.5% down since January 13. Getin, the lender with the biggest ratio of exposure to Swiss franc loans, was 23.7% lower.
However, on top of the Hungarian lead, Warsaw is being pulled along by populist moves in the other countries of the region struggling with forex debt.
Illegal, irresponsible and unconstitutional
On January 23, the Croatian parliament approved a government proposal to freeze the exchange rate used to calculate the Croatian kuna value of personal loans taken out in Swiss francs at HRK6.39 for one year. This was the exchange rate immediately before the Swiss franc-euro peg was abandoned, since when the kuna has weakened by around 20% against the Swiss currency.
The parliament passed amendments to the Consumer Credit Act introducing the rate freeze by 85 votes to one, as MPs from the main opposition party HDZ refused to take part in the vote.
According to a January 19 statement from Croatian Prime Minister Zoran Milanovic, financial institutions will bear the cost of the exchange rate freeze, despite opposition from Croatian banks.
In a statement issued after the parliament vote on January 23, the Croatian Banking Association slammed the move as "not only illegal but also socially irresponsible and unconstitutional". The central bank has also warned that the cost of converting the Swiss franc-denominated mortgage loans into kuna at an exchange rate of HRK6.39 to the fanc could amount to HRK3.8bn (€493.5mn).
Zagreb could take further action to prevent a similar crisis in future. On January 22, Milanovic said the government was considering a bill to outlaw forex mortgage loans. "We must not let things evolve in an uncontrolled manner, as it has been the case so far, and in the future we will work on making sure that housing loans are denominated in the kuna, and that the matter be regulated by law," Milanovic said, according to the Croatian government website.
Milanovic's decision to freeze the Swiss franc exchange rate was expected, as 2015 is an election year in Croatia, with parliamentary elections to be organised in the second half of the year. As of the end of 2014, Swiss franc-denominated loans made up 16% of all lending in the country and some 38% of all mortgage loans were denominated in the Swiss currency.
Presidential elections in December 2014 and January 2015 resulted in a shock defeat for incumbent Ivo Josipovic to the HDZ's candidate Kolinda Grabar-Kitarovic. Josipovic's defeat does not bode well for Milanovic's ruling Social Democrats, and puts pressure on the government to woo voters on issues such as the Swiss franc loan crisis.
In Romania, several hundred Swiss franc debtors demonstrated outside parliament on January 25, demanding that the authorities step in to support them. They are calling for their loans to be converted to local currency loans at the exchange rate prevailing in 2007-2008 when the loans were extended.
However, central bank officials have claimed that debt conversion at any exchange rate other than the market rate would push some banks into bankruptcy. The bank has called for individual solutions negotiated between debtors and banks, while the government wants to adjust existing legislation to provide a two-year grace period to troubled debtors.
Around 75,000 Romanians hold Swiss franc loans, and these borrowers are concentrated at a handful of banks. Volksbank Romania has already taken action to support borrowers by freezing the RON/CHF exchange rate for those paying CHF loan installments over the next three months at the December 31 level.
Elsewhere in Southeast Europe, the Serbian government has opened talks with banks on how to support Swiss franc debtors. Serbian Prime Minister Aleksandar Vucic said on January 22 that Belgrade will only take measures agreed with commercial banks, and has no plans to follow the Croatian example. Around 22,000 Serbians hold Swiss franc loans.
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