Jan Cienski in Warsaw -
Poland's dalliance with foreign currency mortgages, especially those denominated in Swiss francs, continues to cast a pall over the country's banking system as worries grow about the rising strength of the franc due to rising political turmoil in Europe. As elections loom, irate borrowers of such loans also make a tempting target audience for populist politicians.
Forex loans in Swiss francs were enormously popular in Poland before the economic crisis of 2008, with about 80% of all mortgages being denominated in foreign currencies. The reason was that Swiss interest rates were significantly lower than those set by the National Bank of Poland; about 700,000 borrowers succumbed to the temptation. Forex loans now account for 48% of outstanding mortgages.
The risks of that sort of a strategy became apparent after the failure of Lehman Brothers, when the zloty's value against the Swiss franc plummeted. Most borrowers had taken out mortgages when the franc cost about PLN2.4 – the rate briefly shot up to PLN4. Today it's around PLN3.5.
The Swiss National Bank helped when it slashed its rates, also helping keep Polish monthly payments low. However, much of the property bought at the original exchange rate is unsellable because borrowers are underwater – that is they owe more than they borrowed.
Halina Kochalska, an analyst with Open Finance, a mortgage broker, calculates that if a borrower had taken a 30-year, PLN300,000 forex mortgage in mid-2008, they would have paid a monthly rate of PLN1,409 compared with PLN2,130 in zlotys – unsurprisingly there weren't many takers for the zloty loan. That was a mistake. Today, the zloty borrower faces a monthly rate of PLN1,420, while the franc borrower has to cough up PLN1,740.
Even worse, after six years of payments amounting to PLN123,000, the unfortunate franc borrower actually would have to pay the bank about PLN433,000 to clear the loan – about 50% more than the original mortgage.
And the problems don't stop there.
Poland's real estate prices fell in 2008, and have not recovered to pre-crisis levels, making it even more difficult to cancel loans. Further, the central bank's rate setting Monetary Policy Council is expected to cut rates from its already record low of 2.5% – making the comparison with zloty borrowers even more unfavourable.
The Swiss franc has also started to gain against the zloty in recent weeks, driven in part by rising worry over Russia's actions in Ukraine. Poland, which has a robust trading relationship with Russia, stands to be one of the biggest victims of the sanctions being levied by the EU against Russia. That is starting to rattle the central bank.
Until now, forex borrowers have had a good record of repaying their debts. In large part that was because most such loans were granted to urban middle- and upper middle-class people, whose jobs and incomes have been largely unaffected by the waves of crisis. Only 3% of all mortgage loans are in arrears, but that is up from 1.5% at the end of 2009. But if the franc breaks through its current levels and soars towards PLN4 or higher, there could be problems.
There are also political worries. Poland faces a series of elections over the next year – local elections in November, presidential elections next spring and parliamentary elections later in 2015. Hundreds of thousands of irate forex borrowers could become a very attractive grouping of the electrorate to appease.
The right-wing opposition Law and Justice party has already murmured support for borrowers, and the example of what happened in Hungary is unnerving Polish policymakers. There, Prime Minister Viktor Orban helped cement his populist appeal by attacking banks and coming up with schemes to help beleaguered forex borrowers – who were even more numerous than their Polish counterparts.
Hungary's banks had to swallow a $1.7bn loss in 2011 when mortgage holders were allowed to repay their loans at favourable rates. Additional schemes to help borrowers working their way through the Hungarian parliament could cost them billions more.
There is also a class action lawsuit against Polish banks working its way through the country's courts. The lead case has been filed by Tomasz Sadlik, a professional translator, who says he was misled into taking a Swiss franc loan, which he was unable to repay when the zloty fell.
Marek Belka, the central bank governor, is telling Polish banks to be careful. “Foreign currency loans are like a ticking time bomb,” he told bankers during a banking forum earlier this year. “Let's not fool ourselves that it doesn't make any difference, that people are paying them and that you will somehow deal with financing these loans. We can't simply leave this problem alone for the next 20 years. Sit down among yourselves and suggest some sort of innovative solution. This isn't a problem which we should ignore.”
Belka reiterated that concern in a September interview with Bloomberg. “It’s an attractive theme for politicians of all walks of political life,” he said. “I appealed to the banks to do everything to massage it out and to my knowledge they are open to it, they are doing it.”
The solidity of Poland's generally well-regarded banking sector depends on whether banks have, in fact, taken Belka's advice.
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