Polish taxpayers should fear the crisis created by mortgages denominated in Swiss Francs.

Today’s theme is something that has become quite a saga and reminds me of this from Paul Simon.

hello darkness my old friend

I have come to talk with you again

This is because we have been looking at this issue for more than a decade now and it is in vogue in a way as it “blew up” due to large currency swings in the Japanese Yen but particularly for our purposes today the Swiss Franc. Actually there was something familiar last week as the Japanese Yen surged through 139 but let us first remind ourselves of how this problem started. From the Financial Times.

In 2006, Polish couple Marek and Małgorzata Rzewuski bought a house on the outskirts of Warsaw because they were expecting a child and “we wanted more space and our own garden”.
Like hundreds of thousands of other Polish homebuyers at the time, they were advised by their bank to get a mortgage in Swiss francs to benefit from lower interest rates in Switzerland than in Poland. Nobody discussed the flip side of introducing a foreign exchange risk into a 30-year mortgage of SFr200,000 ($205,000).
“This was presented as the best opportunity on the market,” Marek recalls. “The Swiss franc was very stable and very popular and we knew many people who were doing the same.”

The risk here was that they were paying a Swiss Franc liability with a Polish Zloty income or they had taken on a foreign exchange position. Actually there was a flashing amber warning in the Swiss Franc being described as “very stable” but there is no reason for the ordinary person to be aware of that. From the point of view of the Polish banks we see a familiar tale where the lust for commission not only overrides good sense it also leads bankers to behave in a pretty shocking manner.

Actually the Polish courts think so too.

The lending practice in effect ended in 2008. But in the years since, it has become a time bomb for the Polish banking sector as customers like the Rzewuskis have begun winning lawsuits to force their banks to bear the cost of a currency bet that went spectacularly wrong.

The economic background

There is a particular irony in the present situation because we see this.

The Council decided to keep the NBP interest rates unchanged:
▪ reference rate at 6.75%;
▪ lombard rate at 7.25%;
▪ deposit rate at 6.25%;
▪ rediscount rate at 6.80%;
▪ discount rate at 6.85%.

That was from the Polish central bank or NBP last Wednesday and if we look at the Swiss National Bank are you thinking what I am thinking?

We have decided to tighten our monetary
policy further and to raise the SNB policy rate by 0.75 percentage points to 0.5%.

So right now you could pick up a carry of 6% per annum on a variable rate mortgage. Looking good! I guess afters fees the ordinary player would be left with say 4%. But you can see that it is in isolation attractive. But as the Financial Times points out even the unsophisticated should be aware of this.

The franc is now worth more than double its exchange rate of 2 zlotys before the crisis.

4.8 Zloty’s this morning. Actually it has been worse as we saw  5 as the level in early September. But the Polish mortgage borrowers will have seen bother their debt and their monthly payments double.

If we switch to the economic situation we see that the NBP is not optimistic.

In Poland, available monthly data for 2022 Q3, including data on industrial production, construction and assembly output and retail sales, as well as business condition indices, signal that the annual GDP growth decelerated again. A further slowdown of GDP growth is forecast for the coming quarters, while the economic outlook is subject to significant uncertainty.

The Polish statistics office gives us some actual numbers.

In the 2nd quarter of 2022 seasonally adjusted GDP (constant prices, reference year 2015) was lower by 2.1% than in the previous quarter and 4.7% higher than in the 2nd quarter of the previous year.

At the same time Polish workers and consumers are being hit by inflation which is high even for these times.

Inflation in Poland – according to Statistics Poland flash estimate – increased in October 2022 to 17.9% y/y. The increase in inflation in recent months has been mainly due to a gradual pass-through of high commodity prices to consumer prices. High commodity prices were reflected in rising food and energy prices.

So the Polish economic situation is pretty toxic with growth in a sharp reverse and inflation very high.  The NBP has responded with interest-rates just below 7%. Thus we are seeing hard times all round.

What about the banks?

They should be able to make some money from conventional banking with interest-rates at these levels. But the Swiss Franc issue keeps coming back to haunt them.

The court battle comes as banks are already bearing the cost of an eight-month payment holiday granted in July by the government to help mortgage holders cope with inflation, which last month climbed to a 26-year high of 17.9 per cent. ( FT )

The meeting of the Financial Stability Committee back in September did not have a lot to say.

Legal risk associated with the portfolio of FX housing loans and the distressed financial situation of some credit institutions remain the most critical sources of risk to the financial system

But only a few short days later this happened.

WARSAW, Sept 30 (Reuters) – Poland’s Bank Guarantee Fund has started its compulsory restructuring of Getin Noble Bank (GNB.WA), a private lender that faced collapse, the fund said on Friday.

The move will protect client deposits totalling 39.5 billion zloty ($7.98 billion) and safeguard the stability of the financial system, the fund’s statement said.

Although this was rather revealing!

Loans in foreign currencies are excluded from the process, the fund said.

Other banks are struggling too and it raises a wry smile seeing a different German bank hit trouble abroad.

On November 8, mBank joined other Polish institutions in a downturn. It reported a third-quarter loss of 2.28bn zlotys compared with a profit of 27mn zlotys in the same period last year. Its German parent Commerzbank already announced in September a one-time charge of €490mn to provision mBank against Swiss-franc loan exposure. ( FT)

It isn’t always Deutsche Bank. Although we may yet find out that it managed to get involved.

The courts now hold something of a sword of Damocles over the Polisg banking sector.

Polish banks have provisioned a combined 30bn zlotys to cover their Swiss-franc lending. But their final bill could rise by another 100bn zlotys if the judiciary rules that they should have received zero interest rate income on invalid Swiss-franc mortgages, according to Jastrzębski. ( FT)

Comment

As I pointed out earlier the terms for Swiss Franc mortgages for Polish borrowers looks better now than they did in the early part of this century. Best not to put your biggest debt in a foreign currency though. But there are ironies in this saga as we note a hero of the Financial Times having a dark past.

After Donald Tusk became prime minister in 2007, he promised Poland would join the euro within four years.
His confidence gave lenders the green light to accelerate the Swiss-franc scheme. The year Tusk came to power, over half of Polish mortgages were issued in Swiss francs.

Also the banks turned down the sort of moves we saw in Hungary and Croatia.

The law would have forced banks to convert all Swiss-franc mortgages to zloty mortgages and would have cost them about 9.5bn zlotys. But the banks successfully lobbied against the law’s implementation, largely because they had won the initial court cases filed by distressed customers. ( FT)

So the banks have been incompetent at every stage of the process. Yet they still seem to rise to the top.

In April, Polish prime minister Mateusz Morawiecki, who is himself a former bank chief executive ( FT).

So we have a situation where the courts have a lot of power over the banks. But the theme of “The Precious! The Precious!” seems very strong in Poland. All the can-kicking has allowed those in charge to dodge full responsibility and even the PM was a banker. Thus if I was a Polish taxpayer I would be very nervous right now.

Podcast

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