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Central Europe and the Swiss franc: Currency risk

ANXIETY at the Swiss National Bank’s surprise decision today to drop its peg against the euro was nowhere more evident than in central Europe. The Swiss franc soared against all the region’s currencies, including the euro, the Hungarian forint and especially the Polish zloty, and stock exchanges in Poland (pictured) and Hungary dropped sharply. During the global economic crisis, similar swings plunged many borrowers in the region into deep water: they had gorged on low-interest loans (especially mortgages) denominated in Swiss francs, only to find themselves unable to meet payments when the franc’s value rose sharply in 2009. But despite the worried reactions on the bourses, the region is much better prepared for exchange-rate swings today than it was six years ago. The biggest impact of the soaring franc could be political, chiefly in Poland, which is preparing for parliamentary elections this autumn.

The most radical steps to address the Swiss-franc mortgage problem have been taken in Hungary, which also suffered the most severe problems in 2009. Viktor Orban, the prime minister, came to power in 2010 in part on a promise to alleviate the pain felt by millions of Hungarian households trapped with suddenly unaffordable mortgages. The Hungarian government has since forced banks holding forex mortgages, most of them foreign-owned, to convert them into forints at favourable rates. The final phase of that programme takes place this year, and means Hungary has largely been spared from most of the shock caused by the SNB. “The plans by the Hungarian government to convert Swiss franc loans couldn’t have happened at a better time,” says Nick Spiro of Spiro Sovereign Strategy, a credit risk consultancy. 

Romanians borrowed mostly in euros, and Croatian regulators in 2013 ordered banks to convert many franc loans into kunas. The three Baltic nations were enthusiastic euro borrowers, but all have since joined the common currency, ending the mismatch. That leaves Poland as the most exposed central European country to a franc appreciation. Although Polish regulators were more cautious about foreign-currency loans than their Hungarian counterparts, and the loans tended to be given to wealthier borrowers than on the Danube, Poland still has a significant number of such loans. About 14.6% of outstanding loans and 37% of household debt is denominated in francs.

For the moment Polish mortgages being conscientiously repaid, with only 3% in arrears. Even if that rises, the result will probably not be enough to undermine the well-funded banking system, which has a capital adequacy ratio of 15.3%. The broader economy, predicted to grow by 3.5% this year, will also probably feel only a small headwind, although individual banks, especially those which aggressively sold such loans, are seeing their share prices battered. But the franc’s rise could cause political ripples, especially if the Swiss currency stays strong, creating increasing discomfort for as many as 550,000 households which will see their payments skyrocket.

The opposition Law and Justice party has previously made noises about defending franc borrowers from the consequences of their decision, and such calls are likely grow as parliamentary elections near. Recent opinion polls have shown Law and Justice tied with the ruling Civic Platform party, so any gambit that could give one party an edge will become alluring. “The key thing is the political impact,” says Peter Attard Montalto of Nomura. There is no political gesture so popular, in Poland or anywhere else, as a concession to homeowners. Banks that have made Swiss-franc loans in Poland and hoping to get their full value back will be watching the polls with interest.

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The Economist
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