What about Switzerland and those with Swiss Franc mortgages in Eastern Europe?

One of the features of the credit crunch era has been the rise and rise of the Swiss Franc. At a time when many countries are trying to lower their currency – currently the Euro area and Japan for example – it has been something which they have been able to fall against. A major reason for this was the preceding period when what is called the “Carry Trade” saw individuals and companies particularly in Eastern Europe borrow in Swiss Francs to take advantage of often much lower interest-rates. This may be hard to believe for younger readers but back then not everybody had low interest-rates and substantial “carry” gains were apparent. This is equivalent to selling the Swiss Franc and accordingly depressed its value around the middle of the previous decade. Then the credit crunch arrived and many investors decided to ignore the words “Don’t Panic” on the front of The Hitchhikers Guide To The Galaxy and created the beast we see now as they drove it higher. The analogy is that of holding a beach ball under water in a swimming pool we know it will rise once we stop holding it down but nobody spent much time telling those who had Swiss Franc mortgages in Eastern Europe this fact of life.

The story of the Swiss National Bank (SNB) in the credit crunch era has been of an institution struggling to cope with this both intellectually and in reality. This came to wider attention on January 15th when it abandoned its 1.20 cap against the Euro and the Swiss Franc blasted higher to parity and beyond. Such heady times have faded and at 1.06 we see a move of around 11%.

What about Switzerland and its economy?

Often forgotten in this arrangement is what has happened to Switzerland? Well actually considering that the SNB has kept telling us the Swiss Franc is overvalued – yes it is even more overvalued now – the economy has kept forwards momentum. From its December update.

For next year, the SNB still expects to see GDP growth of about 2%.


If we add to that the statistical improvements of ESA 10 the outlook was positive.

As a result of the comprehensive revision of the national accounts, the reported figures for previous quarters are higher, and therefore GDP growth for the current year should also be somewhat higher than assumed in September, by 1.5–2%.


It reports again later this week and many analysts are congregating around the issue of a higher currency as a set back. This may be so but of course the issue discussed below is even more true now.

The considerable fall in oil prices should be a contributory factor.


If we look back to then they would have been considering a fall in the price of Brent Crude Oil to the mid to lower US $60s whereas now it is some ten US Dollars lower. Also the Euro area should see growth in 2015 so the outlook I think is brighter than many would have you believe although we may see an initial impact from the currency shock.

In other news the US Dollar has pretty much replaced the Swiss Franc as the currency appreciator. As they are now at parity we are almost back to January 15th levels showing the extent of the US Dollar’s rise.

What about Eastern Europe?

Heta Bank of Austria

Back on the 2nd of this month we got a strong hint of the problems at play.

We also see another phase in the crisis caused by all the Swiss Franc denominated borrowing which took place in countries which do not use it as a currency.


You see tucked away in the bad bank which is Heta are lots of Swiss Franc denominated loans as we look at matters from the other side of the balance sheet. Bloomberg has updated us on this matter.

Based on current bond prices, Heta’s senior creditors, who bought securities covered by a guarantee from Carinthia province, face losses of more than 40 percent on their 10.2 billion euros of debt.


Someone somewhere is going to lose big and in a repetition of the Hammersmith and Fulham scandal from the beginnings of my career there are wider consequences.

Carinthia, a southern Austrian region of 556,000 people with annual revenue of less than 2.4 billion euros, may face insolvency if the guarantees are triggered.


This echoes with me because as I hinted at above I was involved in a minor and junior fashion when the UK government decided that those who had relied on hints that it backed local council obligations were wrong. As you can imagine it created quite a stir!

On this basis there are genuine issues for Austria going forwards as Heta will not be the only bank facing such issues as many Austrian banks were involved although it is one of the most exposed. Meanwhile of course in the increasingly anesthetized world of the bond vigilantes European Central Bank intervention means that the ten-year bond yield of Austria is completely mispriced at 0.38%.


Here we saw a situation where pre credit crunch somewhere of the order of 30% of mortgages were incepted in Swiss Francs and not Polish Zlotys. There are around half a million Swiss Franc mortgages in Poland. You can imagine how they felt when on January 15th the exchange rate went from 3.55 to 4.4 Zlotys to the Swiss Franc. The situation has improved since then but at 3.9 as I type this then both their mortgage debt and their monthly payment is some 10% higher than it was.

The National Bank of Poland did not put it like this but it did vote with its feet earlier this month.

At the meeting held on 3 and 4 March, the Monetary Policy Council decided to decrease the NBP interest rates by 0.50 percentage points. From 5 March, the reference rate will amount to 1.50%


Imagine if you had panicked and ended your debt at 4.4 Zlotys to the Swiss Franc.


In terms of numbers there were even more Swiss Franc mortgages and loans incepted here. At one point some 60% of borrowing was in Swiss Francs with mortgage borrowing being up to 97% according to the EBRD.. What could go wrong in a country which uses Hungarian Forints as a currency? Actually things got so bad that under what is sometimes called Orbanomics the government of Hungary took action. Accordingly the latest rise in the Swiss Franc will have relatively minor effects on borrowers in Hungary. The catch is that much of the liability went to banks around Europe-  think Heta bank at this point – and some to the Hungarian government. So further issues will arise but they will be in areas you might not expect if you were not aware of the changes.


The situation here has been summed up by Reuters.

About 60,000 Croatians hold loans in Swiss francs, mostly for housing. Croatia’s stock of Swiss franc loans stands at about 27 billion kuna ($4 billion) or a little under 8 percent of gross domestic product (GDP).


It has mulled a solution along the lines of that deployed in Hungary.

Parliament last week backed a government plan to help borrowers by fixing for the next 12 months the franc’s exchange rate at 6.39 kuna, the level before the Swiss National bank abandoned its cap on the currency this month.


The problem is easy, who pays? This is especially relevant in an economy which is struggling anyway and the central bank posted its own warning.

The central bank, however, warned this would reduce Croatia’s currency reserves by 30 percent.



Sadly matters are actually worse in Cyprus than you may have thought. Cyprus Property News takes up the story.

According to the Cyprus Central Bank, Swiss Franc loans amounted to nearly €3.2 billion in November 2014 compared to €1.6 billion in 2006.

Actually much of that change has been the rise of the Swiss Franc as a lot of the mortgage action preceded that period. Let us taste a flavour of it.

“It was very easy to open an account with a bank and Swiss franc mortgages were offered as standard. Many people who bought at the time never even came to Cyprus as bankers and lawyers were flown over to the UK by agents.”

Of course it all went sour and as an aside there seem to be ever more problems with the head of the central bank of Cyprus. Oh how the ECB must regret giving her airtime at its last press conference.


The saga here is part financial,part morality tale and frankly part misery for those with Swiss Franc mortgages. My main fear is that the various establishments have learned so little that such issues may be following the lyrics of Carly Simon.

I know nothing stays the same
But if you’re willing to play the game
It’s coming around again

Meanwhile those with Swiss Franc mortgages in Eastern Europe will be singing along with DJ Luck and MC Neat.

With a little bit of luck
We can make it through the night

With a little bit of luck
We can make it through the night





9 thoughts on “What about Switzerland and those with Swiss Franc mortgages in Eastern Europe?

  1. Hi Shaun
    Back on this side of the ‘pond’.
    Anyone who takes out a mortgage in a currency different to their major ‘income’ currency and doesn’t already have the same amount of funds as capital in that currency ( ie are only taking the mortgage for tax reasons) is a silly sod. Little sympathy for them, but sorry for the other citizens of their nations who are being asked to take their share of the pain.

    • Good point. And the winners from a taxpayer bailout are the same scam artists who sold the foreign currency mortgages.

      Iceland got it right !

    • Hi JW

      I take your point that some were greedy but I also think that some were misled and then exploited to some extent. But the bankers never seem to be held to account do they? So often the burden gets shifted to the taxpayers, and whilst Heta looks like the beginnings of an exception one has to wonder where the losses will eventually end up?!

  2. Hello Shaun

    I’ve also have little sympathy for the mortgage owners , they tried to game the system

    did they know it was rigged ?

    They do now !

    The real issue here is contagion , if Heta goes down , who follows?

    can they print enough QE to cover this ? Also was the ECB needing this QE for this very issue?

    Again all I can see winning is the Banks !

    Expat is right , we should do an “Iceland ” on them but , you know , we’re not in charge , the Banks are

    I want money – the beatles


    Ps yes oil and its gyrations , the issue is the diffential in that WTI is bound by gegraphics and Brent is not .

    not that there much Brent left of course…….but the standard continues.

    most of the LTO is causing issues as well as its condensate, thats natural gasoline ( as first used in model T , needs upgrading for modern engines) drip gas , paint stripper and feed stock for napalm ( yes really orginally ) , its BOE in engergy terms makes it look the “same” but the products refined from it are in different quanties than from crude oil ( API 45 and below) so we can get more petrol but less desiel for example.

    Ah interesting times !

    • “WTI is bound by gegraphics” – I thought it was about legal obstacles since the extra pipelines were finished down to the Gulf?

    • Hi Forbin and Noo2

      The WTI to Brent spead is a curious beast like something out of Alice In Wonderland. The US Energy Information Administration or EIA identified what it considers to be the main causes back in 2013.

      “Spot prices for benchmarks West Texas Intermediate (WTI) and North Sea Brent crude oil neared parity of around $109 per barrel July 19, and the Brent-WTI spread was still as close as $4 on July 30. By contrast, the average Brent-WTI price spread in 2012 was about $19 per barrel, and the spread was $23 per barrel as recently as February 2013. Since spring 2013, prices for these benchmarks have moved much closer together, as WTI increased in relation to Brent. This increase in the WTI price was the result of new U.S. transport infrastructure and U.S. refineries running at near-record levels.

      The spread between Brent and WTI began the year averaging $18 per barrel in January, close to its average 2012 level. The spread had reached wide levels in 2012 as increasing oil production from North Dakota and Texas outpaced the ability of existing pipeline infrastructure to bring that crude to refining centers on the U.S. Gulf Coast. This caused shippers to turn to more expensive modes of transport such as railroads and trucks, causing the price of inland crudes such as WTI to decrease to account for the increase in shipping costs.

      However, that dynamic began to change in 2013. The Brent-WTI spread began to narrow considerably in March and by July the spread averaged just slightly above $3 per barrel, dipping to the lowest level since the start of 2011.”

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