Bloomberg

(Bloomberg) -- Poland’s outgoing central bank chief warned that a chunk of the nation’s $105 billion of reserves would be needed to ensure financial-industry and market stability if plans to bail out foreign-currency mortgage holders go ahead.

Governor Marek Belka, whose six-year term ends this month, said a large-scale unwinding of the loans could sink the Polish currency and destabilize lenders, requiring “a significant part” of reserves to be channeled to banks or into liquidity-boosting swap deals. President Andrzej Duda is reworking plans to assist the nation’s 535,000 foreign-currency borrowers, whose loans are largely in Swiss francs, after Belka called his previous proposal “pure evil.”

“If there’s a wholesale resolution to the Swiss-loan problem, then banks will have to buy francs to close their currency positions, which will weaken the zloty if it’s done on the market,” Belka said Monday in an interview. Using central bank reserves will “of course be taken negatively by the markets, but on the other hand, ending the Swiss-loan issue wouldn’t be that bad for investors.”

Plans to convert foreign-currency loans to zloty have cast a shadow over Poland’s financial industry for more than a year, weakening bank valuations and blocking mergers. Belka said safely resolving the issue will be a priority for Adam Glapinski, his successor. Beyond that, Glapinski will inherit an economy growing at an annual clip of more than 3 percent, without inflationary pressure and boasting a trade surplus.

Zloty Focus

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, lost half of its value against the Swiss franc in the past six years. The nation has 136.8 billion zloty ($35 billion) of Swiss loans.

Belka favors targeted relief for those in distress or a hands-off approach, saying borrowers are “generally doing fine” even after gains in the franc left many mortgage values higher than those of the underlying property. He warned the government, which won power last year pledging to bolster the state’s role in business and has since battled with the European Union over democratic standards, to avoid tinkering with the $545 billion economy.

Hands Off

“We’ll recall these times with nostalgia because there won’t be a better situation,” Belka said. “The Polish economy needs no fixing and my request to those in power is don’t make it worse.”

Belka estimated that Duda’s last plan may cost banks 44 billion zloty ($11 billion) and tip two-thirds of them into the red. The president’s team of advisers will meet next week to decide the “final shape” of the new legislation, Witold Modzelewski, Duda’s chief aide on the issue, told Bloomberg this week.

Political risks have helped push the WIGBank gauge of 15 Warsaw-listed lenders down by 26 percent in the past 12 months, compared with a 19 percent decline in the all-share WIG index, driving valuations to a price-to-book value ratio of 1 in January, the lowest since 2009. Nevertheless, Polish banks have relatively clean balance sheets, with only 6.3 percent of total loans registered as non-performing, including 3.5 percent of those in Swiss francs, according to central bank data compiled by Bloomberg.

Belka’s Wishes

Glapinski, himself a veteran central banker, said in April that resolving the issue “won’t be a disaster” and that the final shape of the legislation will be worked out “in dialog with the industry.” As Polish lenders face other headwinds, including the European Union’s highest taxes and record-low borrowing costs, regulators must help the industry, he said.

“My wishes for the next governor? Don’t fix what isn’t broken -- and Glapinski knows this well,” Belka said. “He faces a difficult situation and himself says that his most important task will be maintaining the stability of the banking sector.”

--With assistance from Maciej Onoszko To contact the reporters on this story: Wojciech Moskwa in Warsaw at wmoskwa@bloomberg.net, Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net, Marta Waldoch in Warsaw at mwaldoch@bloomberg.net. To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Simone Meier at smeier@bloomberg.net, Andrew Langley

©2016 Bloomberg L.P.

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