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The Warsaw Voice » Business » February 27, 2015
Business & Economy
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Economy Stable Despite Swiss Franc Turmoil
February 27, 2015   
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Switzerland’s decision to discontinue EUR/CHF parity poses no threat to the stability of the Polish financial system, nor will an appreciating Swiss franc jeopardize Poland’s economic growth, according to Polish government officials and bank supervision authorities.

TheSwiss central bank (SNB) made a surprising move in mid-January and discontinued the EUR/CHF exchange rate floor of 1.20. As a result, the Swiss currency strengthened against the Polish zloty and the PLN/CHF rate skyrocketed overnight from around 3.50 to over 5. A few hours later it dropped to 4.30, but this was still 20 percent up from before the SNB’s decision. The sharp increase hit Polish borrowers who have taken out mortgage loans denominated in Swiss francs. Calculated in the Polish currency, their debt suddenly grew, resulting in higher monthly loan installments, and the value of their loans rose in relation to the real price of their properties. In total, the Swiss central bank’s decision put 570,000 Polish households at risk of higher monthly installments. The volume of Swiss-franc denominated mortgage loans is equivalent to around 8 percent of Poland’s GDP.

The Polish banking sector and a majority of borrowers should nevertheless be able to deal with such abrupt exchange rate fluctuations, experts say. Stress tests that Poland’s central bank, the NBP, conducted recently have shown that banks could handle an even sharper depreciation of the zloty. Besides, borrowers in this market segment are more creditworthy than others. Irrecoverable loans account for a mere 3 percent of mortgage loans, as compared with 8 percent of all loans in Poland as of the end of November 2014.

Poland’s Financial Stability Committee (KSF), whose members include the finance minister, the central bank governor and the head of the banking supervision authority (KNB), has said that, despite the relatively large portfolio of mortgage loans denominated or indexed in Swiss francs, the Polish banking sector is stable and resilient to external shocks such as volatile exchange rates. According to the Financial Stability Committee, banks in Poland would remain safe even if the franc continued to strengthen. Still, the Financial Stability Committee has recommended that certain restructuring measures be taken. According to the committee, banks should take into account the complexity of the Swiss franc-loan situation, including Switzerland’s interest rates that have been lowered to -0.75 percent. The Financial Stability Committee also said that market risks needed to be approached symmetrically, that is, with both banks and their clients taken into account.

The Polish Bank Association (ZBP) has suggested a number of measures to banks, aimed at reducing the financial burden on CHF-mortgage holders after the franc’s rapid appreciation. Banks could help borrowers by using a negative LIBOR rate on CHF mortgages and cutting FX spreads in the coming months. If such measures failed to work, mortgage holders would be able to ask banks to change their repayment schedules and grant them grace periods. Borrowers would also be able to convert their loans into the Polish currency at the average central bank CHF/PLN rate, or a rate close to it. According to the Polish Bank Association, banks could also refrain from demanding new collateral and insurance on loans from mortgage holders who pay their installments on time. Moreover, the association says, banks should loosen their restructuring regimes on mortgage loans for those borrowers who live in the apartments for which they took out the loans.

Meanwhile, Economy Minister Janusz Piechociński has called for a three-year grace period, free CHF to PLN mortgage conversion at the current NBP exchange rate, and measures to limit FX risk for mortgage holders. Łukasz Piechowiak, chief economist at the Bankier.pl financial website, described Piechociński’s proposal as “very generous to borrowers.” According to Piechowiak, the important thing about Piechociński’s proposal is that money would not be transferred directly from government coffers to all borrowers who claim they are in financial trouble. Instead, such help would only be available for those who had problems repaying their loans for reasons beyond their control. An assessment by Bankier.pl shows that real problems with repaying CHF-denominated mortgages might only occur in the case of up to 10 percent borrowers, which is around 50,000 families.

Piechociński has also proposed a stabilizing measure whereby FX risk would be diversified to make sure that banks would bear part of the cost of higher mortgage installments should the Swiss franc strengthen against the zloty.

In the meantime, experts are saying it is best to wait and see what happens once the CHF/PLN rate stabilizes. A strong Swiss currency is not good news for anyone, and certainly not for the Swiss, and so the prospects of the franc getting cheaper are looking better by the day.

Andrzej Ratajczyk

Łukasz Rozbicki, Investment consultant and analyst MM Prime TFI
Loans denominated in Swiss francs and borrowers’ present and potential problems are now regular topics in the media. But the franc has again dropped below zl.4 and Switzerland’s central bank will probably seek to further depreciate the franc. This could be done through greater activity on the market or through even lower interest rates. Either way, the CHF/PLN rate is for now more than 10 percent higher than it was before Jan. 15, and “franc borrowers” are still paying higher loan installments as a result. This inconvenience has been eased by the fact that banks now need to respect the negative interest rate, in line with the government’s proposal to help franc loan holders. The government has also proposed a three-year grace period and called on banks to refrain from demanding additional collateral from borrowers. Yet another proposal involves the possibility of converting franc-denominated mortgages into zloty loans at no extra cost.

In my opinion, these are good proposals. They are rational and cause no major damage to the banking sector while offering significant relief for CHF mortgage holders. But how will all this affect the economy? Retail sales could be slightly hit in the process, but the low oil prices are more than making up for that. The economy would be affected much worse if the government pressured the banks to do what has been done in Hungary, where banks have converted loans at a historical exchange rate, for example one from the day before the Swiss central bank’s intervention.
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