Bloomberg

(Bloomberg) -- Planned legislation to reduce Poland’s Swiss franc-mortgage burden assumes banking-industry costs will stay capped at around 1 billion zloty ($261 million) per year, according to the latest proposal by President Andrzej Duda’s advisers.

Duda is reworking his initial plan after central bank Governor Marek Belka called it “pure evil” and the financial market regulator said it’s a “recipe for disaster.” The issue of converting $36 billion in foreign-currency loans, mainly denominated in Swiss francs, has hung over the industry for a year, weakening valuations and blocking mergers, adding to the pain for lenders after Poland’s new government implemented the European Union’s highest tax on banks.

The latest set of proposals, unveiled after market close on Tuesday, envisages voluntary participation for borrowers and banks spreading its costs over 30 years to ensure they stay solvent. Duda’s advisers, led by Witold Modzelewski, said the mortgages would be converted into zloty using one of four potential “fair” exchange rates and that banks may create a special purpose vehicle to siphon off their foreign-currency loan portfolios.

“There are precious few details available, but at least they didn’t detonate the a-bomb,” said Dariusz Gorski, an analyst at Bank Zachodni WBK SA in Warsaw. “It’s good that the President’s experts are stressing the importance of maintaining bank stability,” meaning that the “worst scenario didn’t materialize,” he said by phone.

Growing Burden

Poland is following other eastern European countries that moved to convert foreign-currency mortgages, which accumulated before the 2008 financial crisis as borrowers flocked to secure low interest rates. The zloty, eastern Europe’s worst-performing currency this year following Turkey’s lira, lost half of its value against the Swiss franc in the past six years, making the value of more than half of such loans higher than that of the underlying property.

The total cost may be 40 billion zloty over three decades, including 30 billion zloty incurred by lenders and a further 10 billion zloty by borrowers, who would agree to pay to get rid of their foreign-currency loans, Zbigniew Krysiak, another Duda adviser, told Bloomberg News.

Duda’s earlier proposal would have cost the industry between 44.6 billion zloty and 67.2 billion zloty, the watchdog said in March. Poland’s banking industry, where foreign investors control 60 percent of the assets, earned 11.3 billion zloty last year and 4.3 billion zloty in the first four months of 2016, central bank data show.

‘Cloudy’ Outlook

Banks could offset the plan’s costs against their deferred tax assets, helping to spread out the burden over time, according to Krysiak. Creating a special purpose vehicle is an idea backed by the panel, but one that wouldn’t be included in the legislation itself, he said. The plan envisages that banks will also need to return to borrowers profits made on currency-exchange rates and that borrowers can walk away from future payments by giving up their rights to the property.

“The idea of spreading out the costs over time and securitization is key for the industry’s stability but these plans raise concerns over who will book these losses,” said Marta Jezewska-Wasilewska, an analyst at Wood & Co. in Warsaw. “Today’s proposals are only clouding the picture, which shareholders of Polish banks may not like.”

Duda will now consider the plans presented by his advisers. His spokesman said on Sunday that the draft legislation will probably be sent to parliament by the end of June.

Reserves Drain?

A large-scale unwinding of the loans could sink the zloty and destabilize lenders, requiring a “significant part” of Poland’s foreign-currency reserves to be channeled to banks or into liquidity-boosting swap deals, Governor Belka said last week. Modzelewski, a former deputy finance minister, said the proposal doesn’t envisage support from the monetary authority or the budget.

For a story on a central bank’s role in a CHF plan, click here.

The WIGBank gauge of 15 Warsaw-listed lenders has slumped 21 percent in the past 12 months, compared with a 15 percent decline in Warsaw’s all-share WIG index and a 13 percent drop in emerging-market stocks.

--With assistance from Konrad Krasuski To contact the reporters on this story: Marta Waldoch in Warsaw at mwaldoch@bloomberg.net, Maciej Martewicz in Warsaw at mmartewicz@bloomberg.net. To contact the editors responsible for this story: Simone Meier at smeier@bloomberg.net, Wojciech Moskwa, Piotr Bujnicki

©2016 Bloomberg L.P.

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