Is it to be QE for everyone and everywhere?

It was only yesterday that I signed off with the heat is on and indeed it was. That was true if you looked at the fall in the UK Pound or the Norwegian Krona and even more so with crude oil. In response there was an evening emergency meeting ( by telephone) of the European Central Bank. This was because it had been on the back foot in several of its bond markets in spite of its announcement of more QE ( Quantitative Easing) bond buying as recently as last Thursday. In Italy the benchmark ten-year yield approached 3% and reignited crisis fears. So let us go to the response and the emphasis is mine.

To launch a new temporary asset purchase programme of private and public sector securities to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak and escalating diffusion of the coronavirus, COVID-19.

We know what temporary means as for example the original emergency interest-rate cuts were supposed to be that as was the original QE and negative interest-rates. They are all still here. In a way that is the difference this time around as central bank action is supposed to be reversed a few years later when things are better but that never happened. Instead it is “More! More! More!”

This new Pandemic Emergency Purchase Programme (PEPP) will have an overall envelope of €750 billion. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).

Actually they highlight my temporary point because that feels like an end date but later we get this.

The Governing Council will terminate net asset purchases under PEPP once it judges that the coronavirus Covid-19 crisis phase is over, but in any case not before the end of the year.


There are various perspectives to this as assuming they started immediately which they have then there will now be around 115 billion Euros of QE bond purchases from the ECB. There was also this for Italy.

If capital key is fully respected this means almost 10.5 bln additional monthly purchases of BTPs, for the next 9 months. #BringItON  ( @gusbaratta)

As you can see Gus was enthusiastic. I do not know if he was long the market but anyway it seemed set to offer some relief to hard-pressed Italy.

There was also something that looks set to be significant but has got a little lost in the fog.

To the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfil its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks that we face.

That made me thing of the capital key point made by Gus where purchases are proportionate to each country’s share in the ECB itself, This is mostly but not entirely related to the size of their economy. So clearing the decks in case Italy for example needs more and also at the other end of the scale should they run out of bonds to buy in the Netherlands or Germany.

Also there was a plan for Greece.

A waiver of the eligibility requirements for securities issued by the Greek government will be granted for purchases under PEPP.

Rather curiously there are not that many Greek bonds to buy because they have bought so many in the past! The European Stability Mechanism has a very large holding for example.

Together, the EFSF and ESM disbursed €204 billion to Greece, and now hold more than half of its public debt.

Market Reaction

It seems as though the ECB has steamed in this morning all guns blazing or as they put it.

At the same time, purchases under the new PEPP will be conducted in a flexible manner. This allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions.

This has seen the Italian bond future rally over 8 points to 138 as the ten-year yield fell to 1.7%. This is a tactical success although care is needed as only central bankers regard paying much more for something as a success. It should help Italy relax fiscal policy if it is sustained. However, there is a deeper perspective which is that some short of Italian bonds will have been screaming for the financial stretcher-bearers and may not return. Please remember that if down the road we see central bankers and their acolytes complaining of a lack of liquidity.

The situation in equity markets is not so happy because as I type this the Dax of Germany is some 1% lower although the EuroStoxx 50 is hanging onto a few points gain.

The Euro

This is off 1% versus the US Dollar at 1.083 but as we looked at yesterday we are seeing a phase of King Dollar so the picture is blurry. We maybe learn a little that the Euro has slipped against the UK Pound £ but the move is much smaller than its gain yesterday so again we learn not much. So lower yes but we have no way of knowing if the QE has contributed much here in another fail for economics 101.

On that subject someone has announced this morning that they are buying.

The SNB is intervening more strongly in the foreign exchange market to contribute to the stabilisation of
the situation. ( Swiss National Bank)


It feels like yesterday when the Reserve Bank of Australia announced it might do QE if interest-rates were cut to 0.25%. Well this morning we learnt that beds may be burning in the land of midnight oil.

A reduction in the cash rate target to 0.25 per cent.

Followed by.

A target for the yield on 3-year Australian Government bonds of around 0.25 per cent.

This will be achieved through purchases of Government bonds in the secondary market. Purchases of Government bonds and semi-government securities across the yield curve will be conducted to help achieve this target as well as to address market dislocations. These purchases will commence tomorrow.

As I have pointed out earlier please remember the “market dislocations” bit should liquidity disappear and the RBA complains about it.


Earlier this week the Polish central bank joined the party.

NBP will also purchase government bonds on the secondary
market as part of the structural operations that change the long-term liquidity structure in the banking sector and contribute to maintaining the liquidity in the government bond secondary market.

Notice how they are getting a liquidity denial in early? Also they did this.

The Council decided to cut the NBP reference rate by 0.5 percentage points, i.e. to 1.00%

Bank of Korea

From Bloomberg.

The Bank of Korea plans to buy $1.2 billion in government bonds to stabilize markets

I would imagine the central banking dark web is full of messages saying “lightweights” after starting with such a small amount.


When the credit crunch started some central banks sung along with Huey Lewis and te News.

I want a new drug, one that won’t hurt my head
One that won’t make my mouth too dry
Or make my eyes too red

As time has passed more joined in and now the chorus is deafening as more join the QE party. I expect that there will be more in terms of volume for existing players and more new entrants because it is now about oiling the wheels of fiscal policy. When central banks were made “independent” this was not the purpose ( they are not that bright) but the traditional bureaucratic way of appointing people who are to coin a phrase “one of us” means that actually they are doing more than elected politicians would be allowed to. There is a democracy deficit hidden behind the crisis measures.

The picture is complex as there are many areas which badly need help right now. On a personal level in a short space of time I heard about 2 people losing jobs and a business owner losing work. But the history of central bank action is that it favours big not small business or the self employed. One certainty is that once we get any bit of stability the money will pour into the housing market as banks find that easy to do.

Meanwhile we are reminded that mistakes can be very expensive but not for our lords and masters.

Last Thursday: Lagarde says ECB is not there to close bond spreads

Tonight: ECB announces an extra 750 billion of QE to close bond spreads


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.


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.


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.


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.


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.


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.


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 )

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