Whatever happened to those with Swiss Franc mortgages around Europe?

Today brings together several of the themes of these times. The first is currency movements which is particularly apposite to UK readers as the Pound £ over the past 24 hours has dropped like a stone and then bounced hard singing along to those magnificent men in their flying machines.

Up, down, flying around,
looping the loop and defying the ground.

That is not the only mover as I notice the Renminbi in China has been fixed lower again ( 6.7258) as it continues a much more sedate devaluation. So there is as ever plenty of currency risk to go around. Before the credit crunch this was brought home on a large scale by banks who sold foreign currency and in particular Swiss Franc mortgages in central and eastern Europe. It may be hard to believe now at a time of ZIRP ( Zero Interest-Rate Policy) and NIRP ( N=Negative) but there were wide differences between official interest-rates which these mortgages took advantage of. Except nobody took any notice of the currency risk which was exacerbated by the fact it drove the Swiss Franc lower and was just waiting for a financial crisis to blow it up. So another example of bad behaviour from banks and indeed miss-selling.

Boom!

What happened next was that if we look at its move against the Euro the Swiss Franc which was worth 1.68 Euros at its nadir rose and rose and is now 1.09. This meant that the Swiss National Bank which intervened against the move including for a while promising “unlimited intervention” ended up with foreign exchange reserves of over 600 billion Swiss Francs. But more importantly for today’s update those mortgagors looking for a lower interest-rate were hit with a double whammy. This was that the capital sum owed rose as did the monthly repayments as they were set on the amount of debt. Also quite a lot of uncertainty was thrown in.

Less well publicised were the business loans which took place but as you can see from the move would also have seen a very painful change.

Romania

According to the National Bank of Romania this is the position.

The volume of CHF-denominated loans to households stood in December 2015 over 21 percent lower than at end-2014, when these loans amounted to lei 9.8 billion. The number of borrowers with CHF-denominated loans fell further in 2015, standing at 60,429 in December 2015.

The reason for the fall was that some loans have been converted into Lei and amazingly in a way as of course there is a currency risk Euros. Today Reuters brings us more news on this front.

Romania’s lower house of parliament on Tuesday postponed to next week a final vote to approve a bill to help Swiss franc borrowers convert their mortgage loans into local leu currency at historical rates, due to the lack of a quorum…….Deputies have previously agreed to convert all loans of up to 250,000 Swiss francs at the exchange rate they were taken.

These issue have wider consequences as 91% of banking is foreign owned in Romania and according to New Europe the sums are large.

Banks stand to lose €540 million according to Romanian central bank’s estimates. However, if the same principle is applied to all mortgages denominated in a foreign currency, banks stand to lose €9.6 bn.

This may well lead to issues between Romania and Austria.

Mostly Austrian banks in Poland, Croatia, Hungary, Romania, and Serbia, have extended thousands of housing mortgages in Swiss Francs and citizens have seen their double-digit appreciation.

There are certainly effects on the Austrian finances according to Reuters.

Austria will borrow roughly 3 billion euros ($3.4 billion) more this year than originally planned, the Federal Financing Agency said on Tuesday, an increase that is aimed at lending the province of Carinthia the money to buy bonds of “bad bank” Heta Asset Resolution .

If we look at house prices they have risen by 6.8% in the last year in Romania according to Eurostat this morning.

Poland

Back in August Reuters told us this.

Poland’s Financial Stability Committee kickstarted work Wednesday on stepping up capital requirements for banks holding foreign-currency home loans, part of a plan to unwind the country’s $36 billion in non-zloty mortgages…..the country’s 565,000 foreign-currency mortgage holders

So the scale of the problem is much larger than in Romania and therefore we should not be surprised that the Warsaw Voice reported this on Monday.

The Polish government would “solve nothing” but generate a “significant” cost to the banking system by passing the presidential bill on FX spread returns to relieve CHF mortgage borrowers, financial market regulator KNF head Andrzej Jakubiak said………..The cost is “a significant amount” and “a one-off hit,” to the banks’ financial results but not of the kind that would topple banks, Jakubiak also said.

Such thoughts are perhaps why he is the outgoing regulator! But under the surface there are other rumblings going on according to WBJ

More than 500 people have filed a class action lawsuit against mBank in the District Court in Łódź regarding contracts concluded by the bank for Swiss franc-denominated mortgage loans.

So the situation seems yet again dominated by vested interests as the banks which charged into such markets and booked profits seem as always to be able to slither out of the consequences.

For those wondering about property prices today’s update from Eurostat tells us they have risen by 0.4% over the past year.

Cyprus

This is a story of bad news arriving in battalions rather than single spies to use a Shakespearian idiom. Not only was Cyprus hit hard by the Euro area crisis via its links with Greece but some had Swiss Franc mortgages to repay as well. EU Property Solutions give us their spin on the tale.

In early 2016 Cypriot Banks begun to step up their perusal of UK based owners and are becoming more aggressive in their approach. Lenders have begun serving Writs of Summons due to borrowers defaulting on their loan agreements. Figures estimate that c20, 000 UK based borrowers could be effected by taking out Swiss-Franc mortgages………Cypriot properties have been plummeting in value yet some borrowers advise they have seen mortgage repayments TRIPLE from £400 – £1,200 whilst seeing their account fall into negative equity.

According to Cyprus Property News the overall situation could hardly be much worse.

Although Swiss Franc loans declined €274 million in the first half of the year, 80 per cent of the remaining €1,778 million are non-performing according to the head of the Cyprus Central Bank’s Supervision Division.

This next bit may not have you all falling off your seats.

“From the data available to us, it seems that the schemes offered by the banks work better for legal entities than households,” Demetriou told the committee.

Again there are threats of punitive legislation and of course those with incomes in UK Pounds have just taken another hit. If we look at house prices they have fallen by 8.9% in the last year in Cyprus according to Eurostat.

Hungary

There was a lot of pain here too. But the much criticised Orbanomics took early action as the Financial Times observed in January 2015.

But in Hungary, which long had the biggest foreign exchange loan hangover in central and eastern Europe, consumers faced no additional burden. Last November, after several years of trench warfare, Hungary’s government agreed with banks to convert up to €9bn of foreign currency loans into forints at the then market rate.

So pain and some socialisation of bank losses but an example of not letting things get worse as they so noticeably did in January 2015.If we look at house prices they have risen by 10.3% in the last year in Hungary according to Eurostat.

Comment

With currencies in the news I wanted to remind everyone of the costs involved in large moves and in particular for the ordinary person and to some extent business. The senior bankers involved invariably escape scot-free and so quite often do the banks although some of the losses here did mean that some hit rough water. Of course people do not to take some responsibility for their actions and taking a foreign currency mortgage is something unlikely to be done lightly. But I was also struck by these replies to the Financial Times stating the environment back then in Hungary.

in 2002 or 2003 I was in Budapest and they were selling SF loans like MacDonald’s tries to sell it’s hamburgers. ( ldunoldont )

people are not perfect, and just remember the infamous TV ads peddling CHF loans, to be able to imagine the high pressure sales techniques they used on the poor souls who entered a branch to apply for a loan.

I know ppl, with an econ background, who went to the branch with a solid determination to take out an EUR loan and left, 3 hrs later, with a CHF loan…. ( hufnagel )

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17 thoughts on “Whatever happened to those with Swiss Franc mortgages around Europe?

  1. Once again TPTB are prepared to help those who borrow or try to make a quick profit in property but do nothing for savers. It really doesn’t pay to be prudent these days.

  2. Where is the moral hazard?
    Is it not the case that people taking out non-standard loans have the responsibility to acquaint themselves with the bleedin’ obvious dangers beforehand, and if they come to pass, tough luck?
    This time it’s mis-buying, not mis-selling.

    • Hi therrawbuzzin

      In some cases I agree completely with you as if people make choices where they would have taken the profit then losses should be taken too. However for those who were pressurised into it by the banks I think that the banks have a responsibility as well.

  3. it seem what ever our economics woes are they can be amplified by the TBTF Banks , whilst their CEOs wander off with large amounts of wonga in their pockets to some safe tax free haven

    except in Iceland apparently

    If you want a clue who’s really governing you – see who gets off scot free ……

    Forbin

    • Hi Forbin

      The most obvious case currently is Wells Fargo where the scandal is deepening and yet John Stumpf the CEO is due this according to USA Today.

      “Wells Fargo (WFC)’s CEO John Stumpf can walk from the bank with even more money than he could at the end of 2015, despite the $41 million clawback from his unvested stock he agreed to this week.

      The embattled bank’s CEO is still positioned to collect pension accounts and stock valued at $134.1 million if he were to retire, according to calculations based on new data available this week by compensation consulting firm Equilar. That’s even greater than the $123.6 million USA TODAY reported he was eligible to collect at the end of last year.”

  4. Shaun,
    We can add Austrian banks to the list of problem banks in the EU. Spanish construction companies seemed to have passed problem pay motorway projects on to taxpayers now just need to bailout their rail projects in KSA subject to too much sand!

    • Hi Chris

      Yes the Austrian banks have mostly sneaked under the publicity radar but two in particular have featured on here ( Erste and Heta) which is quite a bit for a relatively small country. I did not know about the problems with the rail projects in KSA, have they gone badly wrong?

      • Shaun,
        Details at wolfstreet.com/2016/03/12/Saudi-Arabia-nightmare-for-Spanish-construction-consortium
        I think the Medina – Mecca railway is budgeted to be opening Jan2017 but KSA delaying payments never mind additional disputed cost overruns!

  5. Great blog, Shaun, as always.
    I was curious to see how this situation had evolved in Serbia. The National Bank of Serbia did take measures to alleviate the situation of households with Swiss franc loans in February 2015:
    http://www.balkaninsight.com/en/article/serbian-central-bank-helps-swiss-franc-borrowers
    However, this failed to satisfy many Serb borrowers. As of the end of 2015 about 20 thousand of them still held loans linked to the Swiss franc:
    http://www.balkaninsight.com/en/article/serbian-swiss-franc-borrowers-plan-more-protests-12-01-2015
    In Croatia and Montenegro legislation was passed to convert Swiss-franc denominated loans to euros at the exchange rate prevailing when the loans were taken out. Serb protesters wanted to see similar legislation in Serbia.
    Oddly, it seems that the High Court in Serbia just ruled on Swiss franc loans today. There is an article on it in Blic, a Serbian online newspaper. The English version is obviously a machine translation and makes for difficult reading, but it seems that it ruled that the borrower would get a substantial reduction in the debt to be repaid.
    http://www.blic.rs/vesti/ekonomija/sud-u-novom-sadu-oborio-kredit-u-svajcarcima-smanjio-dug-sa-13-na-tri-miliona-dinara/5sntqdt
    The judgement relates to an individual borrower in Novi Sad, Serbia’s second largest city, and not a class action suit, but it would offer hope to other borrowers in similar circumstances.

    • Hi Andrew

      Thanks for the information. The patterns in the different countries are pretty much the same except the speeds are different. I have a friend who would have been able to translate your last link for me I think ( although he is one who still thinks it all should be Yugoslavia) but I did not see him tonight unfortunately.

      The saddest part is that there has been so little resolution and indeed punishment for those guilty of miss-selling so many years on.

  6. Shaun,
    Hope you don’t mind me raising a point that is not today’s topic however the value / exchange rate of the pound is very much in the news at the moment! Before the crash in the pound I decided to do a rough valuation based on purchasing parity for a basket of supermarket goods and see where the pound stood against the Euro. I have recently visited Germany and Portugal and compared an identical basket in each country to what it would cost here. Surprisingly Portugal was very close to Germany in Euros, close enough to make no difference. I ended up with a valuation of E1.28 to £1.0. now i know this is very crude approximation and doesnt take many things into account but it was an interesting exercise. ( you can see what sort of thing I get up to in my spare time on holiday!!).
    I have also listened to a USB bank report that values Sterling at $1.59 to the pound! I cant comment on that as I have no data from the USA but obviously they do. Some discrepancy!

    Today I have read a report by Deutsche bank that Sterling is still well over valued and that they expect it to fall of a cliff again very soon – (The same cliff that Deutsche bank fell off?) and drop below parity with the Euro.

    Have you any comment on what is a fair value and how markets normally value a currency? I know that the main drivers at the moment are political but somewhere out there there must be a realistic valuation!

  7. Shaun,
    I have an idea that may help mitigate this problem.
    With the fall in stirling, there must be people who earn in dollars,euros,etc. whose mortgage repayments have fallen for a property in the UK.
    Obviously this reduction in payment was the fault of the Banks,
    But the windfall that the individual has received should not be allowed; and thus this windfall should be used to help the people in repayment difficulties in eastern Europe.

    Or perhaps we should just go back to the days, when governments took the (broad) decisions on mortgages; because today, when people take a risk, they expect someone else to pay if they lose, but to keep the money if they win.

    • Hi Nick

      You are right to point out that only one side of any trade is shown these days. I get it right the money is mine. I get it wrong I want compensation! But I do think that there were issue here with mortgages which were in effect gambling on currencies.

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