swiss franc debt

When Tomasz Sadlik took out his mortgage in 2007 to buy a Krakow office for his translation business he needed to borrow 600,000 zlotys ($193,000).

He now owes 1.1m zlotys, because he took the loan not in the Polish currency but in Swiss francs, something that was very popular before the crisis because of the lower interest rates charged on franc-denominated loans. 

Polish borrowers are about to lose one of the last vestiges of the long-gone real estate boom – the ability to borrow lots of money in a foreign currency.

The Polish Financial Supervision Authority (KNF) is preparing to throttle what little remains of forex lending later this year, limiting such loans only to people actually earning euros or Swiss francs. 

After months of wrangling, the Hungarian government and the country’s banks have finally reached agreement in a dispute over foreign-currency mortgage loans.

The deal should bring relief to close to a million Magyar home owners who have been increasingly burdened over the past three years, during which their monthly  mortgage repayments have soared as the forint plunged against the Swiss franc – the original currency of most loan agreements. 

Here comes more trouble for Hungary’s beleaguered banks. According to Bloomberg, seven of the country’s leading banks are being probed by the country’s competition watchdog over possible cartel activity in their mortgage lending.

The news comes hot on the heels of a controversial new law that will force the country’s lenders to share the burden of their customers’ foreign exchange losses and will no doubt heap further tension to the already strained relations between the government and the banking industry. 

The turmoil created in central and eastern European banking on Monday by Erste’s €1.58bn bag of write-offs and exceptional charges has shaken its rivals – and pushed Raiffeisen Bank International to rush out a statement.

After its shares fell by around 12 per cent in early trading, RBI (RBI:VIE) outlined some big advantages over Erste in Hungary, Romania and the eurozone periphery and insisted that it would make a profit for 2011. The stock recovered to trade at €20.60, around 7  per cent down on the day – hardly a ringing endorsement, but considerably better than Erste’s performance (-13 per cent). 

With the forint touching Ft300 to the euro on Wednesday for the second day running, Hungarians can see the price they must pay for the government’s recent move to allow mortgage borrowers to offload some of their foreign exchange losses on to their banks.

While the eurozone crisis is partly responsible for the HUF’s travails, it’s not the whole story. The forint is down 9 per cent in a month, compared to a 5 per cent drop in the Polish zloty and 2 per cent in the Czech crown. And it may have further to fall. 

gavelA bit of good news this week for Hungary’s hard-pressed banks, as they struggle with a new law that will force them to share the burden of their mortgage clients’ foreign exchange losses.

The Supreme Court on Tuesday overturned a lower court ruling that had declared it illegal for a savings bank to raise interest charges in response to higher financing costs. While the wider scope of the judgement isn’t clear, the banks claimed it as a victory. It suggests that the courts might give the banks a decent hearing when they bring their case against the fx mortgages law. 

Hungary’s central bank, concerned over the risk to the banking sector posed by the goverment’s scheme to allow mortgage lenders struggling to repay Swiss-franc loans at below market rates, is to allow domestic banks access to the country’s foreign reserves – if required – in order to “damp financial stability risks,” Bloomberg reports on Tuesday.

Andras Simor, central bank governor, estimates that 20 per cent of Hungary’s €18bn in forex mortgages could be switched into forint loans, causing “significant losses” at local banks, weakening their ability to boost lending and hurting the country’s economic outlook. 

Hungarians will be allowed to wind up their burdensome Swiss franc-denominated mortgages in a lump sum and at a preferential exchange rate of Ft180 to the Swissie (compared to the current market rate of around Ft234), with the exchange rate loss falling on the banks. That’s what Viktor Orban, the Hungarian prime minister, told parliament on Monday, confirming a governing Fidesz-KDNP proposal floated on Friday. 

The Swiss National Bank’s surprise decision to put a ceiling on the franc’s rapid rise against the euro brought relief to hundreds of thousands of unwary central Europeans who had taken out Swissie mortgages. It is also proving to be a respite for the region’s banks. 

Surprise relief for Hungary’s hard-pressed borrowers with Tuesday’s announcement from the Swiss central bank of a minimum exchange rate of SFr1.20 against the euro.

By setting a floor for Swissie/euro rates, the move also bolstered the floating exchange rates of central and eastern Europe, notably that of Hungary’s volatile forint. Good news for CEE borrowers with SFr loans, especially Hungarians. But it may not last long: given the magnitude of the euro crisis, who knows what lies around the corner in the forex markets? 

The Swiss franc might have weakened slightly against the euro and the US dollar from record highs last week, but the stress it has caused borrowers has certainly remained. It is still high enough to be causing worry for the hundreds of thousands of Polish homeowners who took out mortgages denominated in francs and for the banks which lent them the money.

A new study by Open Finance, a financial advisory firm, finds that almost half of the Swiss franc mortgages granted from 2006-208 (the height of Poland’s real estate boom) are underwater – meaning the unfortunate homeowner owes more than the value of the property. 

News on Thursday that the Swiss central bank is prepared to consider temporarily pegging its currency to the euro sent the Swiss franc diving by as much as 6 per cent against the euro and 5 per cent against the US dollar.

While linking the franc to the euro would not happen overnight, and would face steep legal and political hurdles – a change to the Swiss constitution is required for starters – a peg would spell the death of another safe haven for investors.

So good news for EM assets, right? Yes and no. 

HungaryDiligent Hungarian municipalities who worked hard in 2007-2008 to begin development projects utilising EU grants are probably beginning to wish they had shown more characteristic Magyar bureaucratic inertia. Many of these towns and cities funded their own part in these projects using debt denominated in Swiss francs. This seemed a wonder move at the time, given the wide interest rate differential between the franc and forint. 

A Hungarian homeowner with a Swiss Franc mortgage might be forgiven for thinking otherwise, but Barclays Capital insists there’s not a lot to worry about in the recent plunge in CEE currencies against the Swissie.

BarCap says in a report on Wednesday that the macro-economic effects shouldn’t be exaggerated, given that SwFr mortgage repayments amount to just 1.7 per cent of gross domestic product in Hungary – and much less in Poland and Romania.

That’s very reassuring – if you’re not paid in forints. But the mortgage holders will carry on sweating, as will their political leaders.