Jan Cienski in Warsaw -
The Swiss National Bank's decision to end its franc's peg against the euro in mid-January ricocheted in Poland. It caused nightmares for the 550,000 people with mortgages denominated in Swiss francs, played havoc with the share prices and values of local banks, and is causing growing political problems during an election year.
Poland has taken Hungary's place as the Central European country most exposed to the vagaries of the Swiss franc. Hungary's government pushed through several schemes that have more or less ended the issue of foreign currency loans, but they remain a significant problem in Poland. In all, franc-denominated loans account for about 9% of Poland's GDP, making up 14.6% of outstanding loans and 37% of household debt.
In Poland, as elsewhere in Central Europe and Austria, Swiss franc loans had been enormously popular before the 2008 economic crisis. By the turn of the millennium, much of the region had established modern banking systems and for the first time banks started offering long-term mortgages. However, interest rates in Polish zlotys, Hungarian forints and Romanian lei were significantly more expensive than those denominated in francs. Austrian banks, which had spread across the CEE region, were already familiar with the product, where it was very popular with Austrians, and enthusiastically lent Swiss francs.
But borrowers, banks and regulators all underestimated the risk of borrowing in a foreign currency. The size of that gamble became apparent with the advent of the economic crisis, when the value of CEE currencies plummeted against the Swiss franc, which became a global safe haven.
The latest lurch in the value of the Swiss franc has been particularly painful for Poles. The franc briefly hit PLN4.30, before settling just below PLN4. Before the 2008 crisis, a period which marked the high point of a Polish real estate boom, the value of the zloty had peaked at just under PLN2 to the franc.
As a result, many mortgages are under water, with borrowers owing more than the value of their properties, and the overall size of most loans is significantly larger today than on the day the mortgage was taken, despite eight years of payments.
Policy-makers immediately scrambled to help minimise the shock of the stronger franc. Polish banks were put under enormous pressure to feed through Switzerland’s negative interest rates to their customers, and to reduce their often rapacious spreads – the fees charged to convert zlotys into francs to make mortgage payments.
But there is a growing sense in Poland that a more systemic approach will have to be taken to finally cleanse banking balance sheets of the Swiss franc mess. So far only 3.1% of franc loans are in trouble, compared with a 3.6% non-performing ratio for zloty loans, but there are worries that the franc's strength could worsen those numbers. “The rapid appreciation of the Swiss franc, if sustained, will likely increase the cost of instalments for borrowers, negatively affecting their debt-servicing capacity, and likely lead to nonperforming loans for this asset class surpassing the level of nonperforming loans of the zloty-denominated mortgages,” said Moody's Investors Service, a rating agency.
The issue has become political. The ruling Civic Platform party of Prime Minister Ewa Kopacz is in a tight race with the opposition Law and Justice party ahead of this autumn's parliamentary elections. Most franc borrowers are from the urban middle classes, Civic Platform's natural electorate. While they may not be enticed to shift to Law and Justice – which has been making sympathetic noises about their plight – they may simply not bother to vote, hurting Kopacz. “I can only say that if I had to choose between the interests of the banks or the interests of those who took such loans, I will stand on the side of the people,” Kopacz said in a recent interview, quickly adding however that any solution that helps franc borrowers “should not be done at the cost of the budget”.
Mateusz Szczurek, the finance minister, has been sceptical of any quick move to help franc borrowers, remarking that if mortgages were recalculated into zlotys at the rate they were first taken out, banks could see a one-year PLN20bn (€4.8bn) hit to their bottom lines. Andrzej Jakubiak, head of the Polish Financial Supervision Authority, is suggesting a plan that would convert franc loans into zloty ones at a cost of about PLN1.2bn a year over the next two decades. Banks are cool to any such idea, and the sector is discussing the issue with regulators.
The uncertainty surrounding the issue is also worrying investors. Some of the most aggressive franc lenders like Bank Millennium, a subsidiary of Portugal's BCP, and Getin Noble, a Polish bank, have seen their share prices plummet in recent weeks. Shares in Getin, with about a fifth of its outstanding loans denominated in Swiss francs, have fallen by 24% in the last month.
The Swiss problem is also affecting the sale value of banks. Several banks, many with a Swiss loan portfolio, are being considered for sale. The latest is Raiffeisen Polbank, the Polish subsidiary of Austria’s Raiffeisen Bank International, which is offloading its Polish operation because the cost of growing its market share is simply too high. Martin Gruell, RBI’s chief financial officer, told a conference call recently that he had no intention of selling the bank on the cheap. “In Poland we expect a price above book value,” he said.
But potential buyers are warier, in large part because of the €2.8bn in Swiss franc loans on the books of the Polish subsidiary. Luigi Lovaglio, CEO of Bank Pekao, the country's second largest and a unit of Italy's UniCredit, told reporters that he has no plans of paying above book value. “Currently it is very difficult to buy a bank above book value, not just in Poland,” he noted.
For now, the slight strengthening of the zloty against the franc, plus steps like passing through negative interest rates, are mitigating some of the shock caused by the Swiss central bank’s unexpected decision. Furthermore, the banking sector is solid; stress tests last year showed that a 30% rise in the franc would cause the sector’s Tier 1 capital ratio to fall by only 20 basis points to 13.28%.
Demetrios Efstathiou of Standard Bank says that Poland would be hit hard by any further swing in the Swiss franc, but it’s arguably best placed to deal with it. “Poland has a strong economy with 2014 GDP growth rate at 3.3%, and a similar rate expected in 2015, with per capita GDP now over USD14,000. Meanwhile, its banks are well capitalised,” he notes.
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