Poland hit by franc ricochet

By Beata Socha, Managing Editor, WBJ Observer Although overshadowed by the European Central  Bank’s (ECB) decision to launch Quantitative Easing and pump billions of euros into the euro zone, the Swiss franc has not only been on the lips of economists and market players but also took over dinner conversations in hundreds of thousands of Polish households in the last weeks of January. The turmoil started with the January 15 decision of the Swiss National Bank to no longer maintain a fixed exchange rate of 1.20 against the euro, which had been in place since mid-2011. In a feeble attempt to cushion the blow, the SNB announced at the same time it had lowered the Swiss interest rate to -0.75. Markets responded frantically, with the EUR/CHF exchange rate tumbling down below 0.9, while the CHF/PLN pair in turn shot up to a record-high rate of above 5.0 (from the opening rate of 3.57 on that day). After a few nerve-racking days the CHF/PLN pair stabilized at around 4.2, a level which the National Bank of Poland had considered an “extreme” scenario only a couple months earlier. In stress tests conducted in November 2014, one bank was even listed as being in danger of insolvency at that exchange level. Polish officials responded immediately. First to calm down the markets, then to assure the 550,000 Poles with franc-denominated mortgages that they won’t be left stranded in their predicament. Drop it like it’s hot The NBP head Marek Belka stated firmly that the Polish financial system is not at risk. But that didn’t help Polish banks much, whose share prices slumped. Some even recorded a drop of as much as 30 percent, as was the case of Getin Noble Bank, which has one of the highest shares of Swiss-denominated mortgage loans. Warsaw Stock Exchange index WIG Banki dropped by 8 percent over the next week before recovering slightly. Then a heated debate ensued whether or not banks should be obligated to include the negative LIBOR interest rate in calculating their clients’ payments. Interestingly, some banks, apparently in anticipation of the negative LIBOR, had unilaterally changed their mortgage agreements a few years back so that when the Swiss interest rate hit negative numbers, they could instead use zero in their equations, thus keeping their margins intact. Obviously, the soaring franc exchange rate and the public outcry made it impossible for them to hold onto their margins any more. Finance Minister Mateusz Szczurek even called this move a “gross violation of risk symmetry.” In a situation where the borrower bears the risk of the exchange rate, banks have to carry the risk of the interest rate, he stated. Heads weigh in Still, franc borrowers began to demand that they be allowed to convert their mortgage loans at a conversion rate from before the CHF surge. Victor Orbán’s decision to do just that with Hungarian mortgages was cited on more than one occasion, as a stellar example of how a country takes care of its people. Naturally, some pointed out the differences between Hungarian mortgage loans (which had a fixed interest rate and LIBOR cuts did nothing for the borrowers) and Polish ones (where the CHF climb has been partially cushioned by lower interest rates). Hopes were raised when the head of the Financial Supervision Authority (KNF) Andrzej Jakubiak posited the possibility of debt conversion at the exchange rate from when the mortgage deal was originally signed, so long as the borrower covered the difference between his actual payments over the years and an equivalent mortgage denominated in złotys (franc loans were, until recently, cheaper than the złoty-denominated ones). The idea has been tabled for the time being and for now the government has suggested alternative means of relieving franc-borrowers, either by establishing a three-year “loan vacation” (repayment suspension) or by setting limits on monthly installments, so that the borrowers remain solvent. Now, if any debt conversion is mentioned, it is always at the current exchange rate, and that’s not a rosy picture for those whose house’s loan-to-value ratio greatly exceeds 100 percent. A political matter As with most socially-relevant issues, the debate on franc mortgages is on its way to becoming a political tug of war. The opposition claims that it was the ruling coalition’s inaction that “has brought tens of thousands of Poles to the verge of bankruptcy,” as Law and Justice member Mariusz Błaszczak told TVN24. Some deemed it necessary to remind Law and Justice that they had fought tooth and nail for banks to keep granting Swiss franc loans back in 2006 when the Banking Supervision Commission (absorbed by the KNF in 2008) was already considering doing away with foreign currency mortgages. Looking for balance After the ECB decision of January 22 to start Quantitative Easing, the franc started a gradual decline towards PLN 4.1, still nowhere near the levels from before the shock. The situation of Polish borrowers is still far from resolved and it is likely to remain one of the key issues in the upcoming presidential election (due in May) and later parliamentary election (slated for October). The number of all those affected by franc mortgages (including the families of franc-borrowers) is estimated at some 2 million, a force that could easily sway the vote one way or the other. For instance, in the previous presidential election, President Bronisław Komorowski received less than 7 million votes in total in the first round of voting and some 9 million in the second. Where the franc debate will lead, remains to be seen. For now, markets are beginning to settle down and the banks that were hit the hardest in the aftermath are slowly recovering. One thing is certain – the Swiss franc seesaw has taught Poles a valuable lesson they are unlikely to forget any time soon.