Swiss franc surge knocks zloty and forint

By bne IntelliNews January 15, 2015

bne IntelliNews -


The Swiss Central Bank's surprise decision to end its peg with the euro sent shockwaves through Central European currencies and banks on January 15. Many Central Europeans have taken out mortgages denominated in Swiss francs, potentially leaving them open to massive hikes in repayment costs, and exposing banks to a surge in defaults.

The Swiss central bank abandoned its ceiling of CHF1.20 against the euro, leading the Swiss franc to shoot up 28% against the euro. By mid-afternoon it was still up 14.9% at CHF1.0219. 

Hungary had been the most at-risk country, as local borrowers had gorged on cheaper franc-denominated loans before the crisis. However, Prime Minister Viktor Orban’s government has pushed through a programme converting foreign exchange loans into forints, largely ending the problem. Other CEE countries like Romania and Croatia had mostly borrowed in euros. That leaves Poland as the most exposed.

The Polish zloty reacted immediately, falling from an opening rate of PLN3.55 to the franc to PLN5.19, before recovering by early afternoon to about PLN4.19. 

“Poland stands out as the most interesting case,” says Peter Attard Montalto, an analyst with Nomura, the investment bank. Swiss franc loans make up 14.6% of outstanding loans, and account for 37% of all housing loans by value.

“In Hungary – where the Swiss franc borrowing binge was largest – a policy is now in place whereby households can convert foreign currency mortgages into forint at the exchange rate prevailing in November 2014. Any households that haven’t converted a Swiss franc mortgage yet are likely to do so,” says William Jackson, emerging market economist at Capital Economics. “Polish households’ don’t have the benefits of such a policy.”

However, he went on to say that Polish regulators were more careful about forex loans than their Hungarian counterparts, meaning that the problem never grew to Hungarian proportions. Polish forex borrowers also tend to be wealthier than Hungarians, and Polish loans have floating interest rates while Hungarian loans were fixed, which means Poles have benefitted from the SNB’s rate cuts.“The impact of the recent franc appreciation is likely to be manageable,” he says.

At the moment, only 3% of outstanding mortgage loans are in arrears and the Polish banking system is well financed, with a 15.3% capital adequacy ratio. However, that has not stopped bank stocks from plunging on the Warsaw Stock Exchange. Getin Noble Bank, once one of the most aggressive peddlers of Swiss franc loans, saw its share price drop by 15%, while Bank Millennium, owned by Portugal’s BCP, fell by 7.5%.

Any pain felt by the 550,000 Polish households with franc loans could act as a drag on consumption, slightly slowing growth which has been estimated at 3.5% for 2015, but analysts felt that the broader economic impact will be limited. The zloty’s swoon is likely to reinforce caution at the central bank’s rate-setting Monetary Policy Council, which earlier this week stuck with the current benchmark of 2% despite pressure to cut from Marek Belka, the central bank governor.

“If the franc doesn’t fall back over the coming days and weeks, the Polish National Bank is likely to delay the interest rate cuts that had looked likely over the coming months,” says Jackson.

In Hungary, the forint plummeted to a record low against the Swiss franc by mid morning, falling to HUF315 to the swiss franc after opening at HUF266. The Swiss franc developments have major implications because up to 1.3mn Hungarian households are set to convert foreign currency mortgages back to forints,  sparking fears that the banking sector would pay for holding Swiss liabilities but having to pay in Hungarian forints.

But a Hungarian Central Bank decision to tender some €9bn to banks in November 2014 now looks to have averted disaster, with most banks using those euros to buy up francs. “It’s kind of like Hollywood, just before the final blow, they escaped,” said one economist at a major Hungarian bank. At one time the sector was exposed to the tune of CHF12bn, but this number is likely just CHF1bn or CHF2bn now, he said. 

The non-financial corporate sector is now seen as the most exposed to fluctuations in the franc. “This suggests that the move in CHF may hurt the corporate profitability and hold back investments, though it is unlikely to expose the Hungarian banking system to systemic risk,” Esther Gargyan, an economist with Citi, wrote in a flash note. “Households have €1.8bn worth of CHF-denominated debt left, mostly related to car lease contracts, thus the impacts on consumption is likely to be negligible.”

Prior to the 2008 financial crisis tens of thousands Hungarian borrowers took out loans in foreign currencies, especially Swiss francs. Many found making payments increasingly difficult as the value of the forint fell, leading Orban’s government to try a series of policies to ease the burden, with the currency conversion plan for mortgages as the latest move. 

Back in November, the Hungarian government set the planned exchange rates for mortgages at HUF256.47  to the Swiss franc and HUF308.97 to the euro. At the time, banks breathed a sigh of relief as they had feared the government would set more punitive exchange rates, and the infusion of euros by the central bank enabled most banks to limit their exposure. While conversions are effective as of February 1, debt obligations were calculated at those rates from the beginning of the year, further negating the sharp rise in the franc today. Interest rates on the converted mortgages are linked to the three-month BUBOR (Budapest Interbank Offered Rate), now 2.1%. 





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