Thursday, November 24, 2022

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

What the hell? The Poles have been there and done that.

And now they're doing it again?

From Notayesmanseconomics Blog, November 14:

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.

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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.....


Also at From Notayesmanseconomics Blog:

Are the Swedes back to being sadomonetarists?

Previously on this dangerous, dangerous madness:

June 2019   
Over the years we've harped on the risks of borrowing in a currency other than the one in which you earn your income.
The quintessence were the Polish homeowners enticed by ultra-low interest rates who took out Swiss franc denominated mortgages which they paid by earning in zloty, converting to CHF and sending in the payments. When the franc appreciated it took more and more zloty to buy the francs, to the point in some situations the homeowners owed more on the mortgages than their monthly income.

 Previously on borrowing in a foreign currency:

Our Dec. 2014 post: Evans-Pritchard: "Dollar surge endangers global debt edifice, warns BIS":
Two quick points*:
1) This is the second BIS warning in under six months.
2) It is very dangerous to borrow in a currency other than the one in which you earn your income.
True at retail, true at wholesale....
Reprised in "'Russian ruble's fall: A classic 'currency collapse'" and Why It's Such a Big Deal".
Borrow In Dollars, Pay In Tears 
We've said ad nauseum*
Remember When the BIS Was Warning That A Strong Dollar Would Wreck Everything?

In Which Izabella Also Comments On Russia and Foreign Liabilities
We beat her to it, I think. Our post "Russian ruble's fall: A classic 'currency collapse'" and Why It's Such a Big Deal" was timestamped at 11:56 am PST while hers is 20:07 GMT. 11 minutes ahead.
Great minds and all that....

And some of our January 2015 posts on the plight of the Polish home buyers: