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(Bloomberg) -- While Polish government borrowing costs are tumbling thanks to the European Central Bank, the nation’s lenders risk missing out as investors speculate on the cost to bail out their Swiss-franc mortgage clients.
The extra yield over government rates on euro-denominated bonds due January 2023 from PKO Bank Polski SA, the largest Polish lender, has climbed to 90 basis points from 75 at the start of this year. PKO was paying 206 basis points less to borrow than Hungarian peer OTP Bank Nyrt. on Jan. 19; since then that discount has narrowed to 169 basis points.
Two months after Hungarian Prime Minister Viktor Orban forced banks to convert their Swiss franc mortgages into forint at a cost of $1.7 billion, Polish premier Ewa Kopacz said she expects banks to pick up the tab. The cost to convert $35 billion of mortgages in the currency into zloty at the exchange rate when the loans were signed may be as high as 34 billion zloty ($9.1 billion), according to Trigon Dom Maklerski SA, a Warsaw-based brokerage.
“The latest comments show that the risk of forced conversion may materialize,” Marta Jezewska-Wasilewska, a Warsaw-based analyst at Wood & Co., said by phone Monday. “That is a huge risk to the perception of Polish banks. Costs will amount to billions of zloty no matter what exchange rate is set, and we’re opening a Pandora’s Box for further pressure on banks.”
Switzerland’s decision to end its currency cap on Jan. 15 sent the zloty tumbling 22 percent against the franc, increasing payments for more than half a million families who borrowed in the currency. Their higher installments have become a political issue in an election year.
Switching the currency of loans from francs to zloty will probably be among a list of government proposals by the end of this week for the financial regulator to introduce quickly, Kopacz said yesterday on Polish Radio’s Channel One.
“If I have to choose between the interests of banks and of ordinary borrowers, I’ll side with the people,” Kopacz said. “It will be the banks that foot the bill, not the state budget.”
Poland joins Croatia, Romania and Serbia among countries considering imposing non-market currency conversions on lenders. Croatian lawmakers approved a plan that will cost banks about $73 million, according to the central bank’s estimates.
Poland’s Financial Supervision Authority calculated in October 2013 that converting loans to the exchange rate on the day contracts were signed would cost as much as 50 billion zloty.
“Transferring the currency losses from borrowers to banks via forced conversion is not the right way, and may cost Poland credibility,” Lutz Roehmeyer, who helps oversee $1.1 billion of emerging-market debt as a money manager at Landesbank Berlin Investment GmbH, said by e-mail yesterday from Berlin. “It will also make Polish banks’ financing abroad very hard and more costly.”
The idea of requiring banks to switch the exchange rate on loans wasn’t among the conclusions from a meeting between central bank Governor Marek Belka, the financial markets regulator and commercial banks last week. Participants at that meeting agreed banks should take into account negative Swiss interest rates, avoid demanding additional collateral and extend loan maturities for those clients running into problems repaying.
The Polish Bank Association had advised its members to convert loans where requested by clients without extra fees, using the central bank’s official exchange rate, according to a statement posted on its website on Jan. 23. Krzysztof Pietraszkiewicz, the head of the association, didn’t answer calls to his mobile phone yesterday.
Radoslaw Bodys, the chief economist at PKO in Warsaw, said the currency conversion idea was “impractical” and “unlikely to be implemented,” in an e-mailed report yesterday.
The zloty strengthened 2.6 percent to 4.1571 a Swiss franc yesterday at 5:23 p.m., trimming this year loss to 17 percent. That compares to a range between 1.97 and 3.02 in 2008, when a record number of 165,600 franc-denominated loans were signed.
“If the government decides that banks should bear part of the costs of conversion, that will increase financing costs further, especially for those who were active sellers of foreign loans,” Radoslaw Cholewinski, who helps manage the equivalent of $4.8 billion at Pioneer Pekao TFI, said by phone yesterday.
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