Crunch time as Poland decides on $42bn of Swiss franc mortgages

Many homes in Poland are financed by Swiss francs Keystone
This content was published on April 14, 2016 - 14:05
Neil Buckley, Financial Times

Investors in Poland have already been spooked by the conservative Law and Justice government’s efforts to bolster its political power, including by neutering the constitutional court.

But the country faces a decision that could be crucial to market sentiment and have far-reaching systemic consequences: how to deal with Swiss-franc mortgages extended to local borrowers before the 2008 financial crisis.

More than half a million Poles hold such loans, totalling $42bn. Most took them out pre-crisis to take advantage of lower Swiss interest rates. But after the Swiss central bank scrapped its currency cap in January 2015, many found themselves struggling to meet higher repayment costs.

Emulating its near neighbour Hungary, the office of Andrzej Duda, president, published a draft law in January that would force banks to convert foreign-currency loans into zloty at historical exchange rates, and shoulder the resulting losses.


Regulators and rating agencies have warned starkly that the plan, unless modified, could trigger a banking crisis in the EU’s sixth-largest economy. Foreign banks such as UniCredit, Santander, ING and Raiffeisen account for 60 per cent of Polish banking assets.

An amended draft is due to be published, possibly as early as next week, and plenty is at stake. The Polish banking sector largely shrugged off the original financial crisis and its strength has been an important factor in the country’s long-running economic boom.

Bank asset tax

In Hungary actions against the mainly foreign-owned banks have depressed lending and foreign investment. Investors had hoped Poland would not go as far, but Law and Justice has borrowed heavily from the Hungarian playbook. It has imposed a tax on bank assets, albeit at a slightly lower rate than its neighbour.

The European Central Bank and rating agencies have warned of potential negative effects from the tax. Unlike bank taxes imposed elsewhere to deal with specific risks or help repay bank bailouts, in Poland the levy will help fund an increase in child benefit that was a centrepiece of the ruling party’s election campaign last year. Banks have also been hit by increased contributions into a deposit guarantee scheme.

Coming on top of those measures, the loan conversion plan is an even bigger concern. Poland’s central bank warned in February that the cost to banks could reach 44bn zlotys ($11.6bn). Its governor, Marek Belka, called the draft bill “evil” and a “recipe for a banking crisis”.

Then last month the KNF financial regulator estimated the costs to banks at 67bn zlotys. It warned that the plan might “not only shake the stability of some banks but also lead to loss of trust for the banking system, and in a worst-case scenario cause a financial crisis”.

Mr Duda’s office quickly said the president would take the KNF estimates into account, and his priority was to help borrowers while maintaining banking stability. He president told a Polish newspaper last week the bill was being rewritten.

"Hefty losses"

Polish media later suggested that the presidency was trying to get the central bank to lend to the banks to offset the zloty conversion costs, which would then be repaid over 20 to 30 years.

That could help avoid crippling upfront charges, which could undermine banks’ capital bases and cause a credit crunch. But it is unclear how investors would react if the central bank’s balance sheet were used in that way.

Peter Attard Montalto, an analyst at Nomura, says investors have been underestimating the likely impact of the conversion bill, calculating that the government will ultimately shy away from imposing heavy losses on banks.

“I think that’s true to an extent, which is why they are redrafting the bill,” he said. “But they won’t kick it into touch. There will still be quite hefty losses.”

Mr Attard Montalto suggests that Law and Justice is less ideological and more pragmatic than Hungary’s Fidesz party, which seems innately hostile to foreign banks. Other measures that the Warsaw government is planning, including a big public-private investment programme, could boost medium-term growth, offsetting near-term hits to the investment climate, he says.

Giving Law and Justice the benefit of the doubt, however, is risky. Since it came to power seven months ago its policies, in both the political and business fields,have tended to be more hardline than expected - not less. 

Copyright The Financial Times Limited 2016

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