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(Bloomberg) -- Markets “overreacted” to the risk created for eastern Europe by the Swiss National Bank abandoning its cap on the franc, said Piroska Nagy, an economist at the European Bank for Reconstruction and Development.
The unexpected move on Jan. 15 roiled markets worldwide. Currencies plunged in countries including Hungary, Poland and Romania, where franc lending was widespread in the boom years before the 2008 financial crisis as borrowers sought lower interest rates than those on forint, zloty and leu loans.
Unlike at the height of the financial crisis, when outstanding Swiss franc mortgages threatened to sink banks in the region, the risk is now “manageable,” Nagy said in a post on the London-based bank’s website. Efforts by regulators and governments in recent years helped reduce the amount of affected mortgages, she said.
“Countries of the region have made good progress in reducing their foreign-exchange exposure, particularly in CHF, a notoriously bad practice,” Nagy said. “There is little or no danger of a systemic risk, in contrast to the situation at the height of the global financial crisis. The markets will take note once the dust has settled.”
The Romanian leu has declined 17.4 percent against the franc since the cap’s removal, the Polish zloty has lost 16.9 percent and the Hungarian forint is down 15.3 percent.
At the start of the financial crisis, the stock of these mortgages was “dangerous,” especially in Hungary, where 97 percent of home loans were denominated in Swiss francs, according to Nagy. Authorities in Budapest have since almost entirely eliminated foreign-currency debt, she said.
While the “coercive” way in which banks were forced to swallow losses attracted criticism, “in hindsight there is relief that Swiss exposures are reduced or gone,” Nagy said.
In Poland, the Swiss-franc “debt problem was never a big issue,” she said. These mortgages account for about 8 percent of the economy and are held by the highest-quality borrowers, according to Nagy. The government is looking to introduce measures to limit the fallout.
In Croatia, Swiss franc loans equal about 7.2 percent of gross domestic product, Nagy said. Lawmakers last week limited the exchange rate on these loans to the levels before the Swiss move, making “well-capitalized” banks bear the losses, Nagy said.
While a relatively small number of households are still affected, the main danger today is “the amplified political cost,” according to Nagy. As Swiss-franc loan exposure “can still generate panic reactions, it may be the time for solutions to be found, in coordination with the banking industry, to settle the situation once and for all,” she said.
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