Austrian Franc Mortgages May Have $7 Billion Gap, Central Bank Says

Austrians with Swiss franc- denominated mortgages are facing a widening gap between their repayment obligation on maturity and the investment vehicles used to accrue their savings, the nation’s central bank said.

The shortfall between the savings vehicles’ projected funds on maturity and the principal due widened to 5.4 billion euros ($7 billion) as of June, up from 4.5 billion euros at the end of 2008, the central bank said in its half-yearly Financial Stability Report released today. That’s due to the rise of the franc versus the euro and because the vehicles’ investments suffer from weak financial markets, the central bank said, adding that the gap probably has widened further since June.

Austria is unique among euro-area countries in that its households have borrowed 41.2 billion euros ($53.7 billion) in foreign currencies, mostly in francs and for mortgages, a practice that was stopped by regulators in 2009. Three in four borrowers also pay only their interest in monthly installments, while the principal is due at maturity and is covered by the investment vehicle, most of which are based on mutual funds. The vehicles are known as Tilgungstraeger, or “repayment funds.”

“We have regularly warned about this twin risk for 10 years,” said Andreas Ittner, the central bank director responsible for banking supervision. “Those warnings weren’t taken seriously. We’re now in a situation where both the exchange rate and the value of the investment vehicle are going against the borrower.”

The funding gap is calculated as the difference between the loans’ principal due on maturity and the projected savings at the time, using data collected in a survey of Austrian lenders, the central bank said. Most of the loans begin to mature in the years from 2020, it said.

Austrian banks including Erste Group Bank AG (EBS) and Raiffeisen Bank International AG (RBI) exported foreign currency lending to eastern European countries including Hungary, Romania and Croatia, where their subsidiaries are among the biggest lenders.

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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