The Swiss central bank’s decision to cap the appreciation of the nation’s currency against the euro may fall short of helping eastern European borrowers repay mortgages denominated in francs and get them to spend.
The forint and the zloty have climbed 8 percent against the franc since yesterday’s announcement, compared with repayment costs that have risen 77 percent in Hungary and 93 percent in Poland since mid-2008, according to Capital Economics. The collapse of Lehman Brothers Holdings Inc. that year ended an economic boom that spurred demand for franc loans to escape higher local interest rates.
“The pain is still there,” Luis Costa, an emerging-markets strategist at Citigroup Inc. in London, said in a telephone interview yesterday. “The fact that at least they are trying to cap the Swiss franc appreciation helps of course. At least it’s not going to get worse. This doesn’t resolve the problem.”
Two-thirds of Hungarian mortgages and 54 percent of Polish loans are based in francs, accounting for 16 percent and 10 percent of gross domestic product, respectively, according to UBS Wealth Management. The franc soared to records against most of its counterparts as investors took refuge in the Alpine country’s currency as the U.S. skirted a recession and the euro region’s debt crisis remained unresolved.
The Swiss National Bank’s ceiling of 1.20 francs per euro translates to about 229 forint and 3.51 zloty against the franc, compared with July 2008 rates of 140 forint and 1.96 zloty, according to Bloomberg data.
The SNB resorted to the exchange-rate cap after measures last month to boost liquidity to the money market and lowering borrowing costs to zero didn’t prove sufficient to contain the appreciation.
Yesterday’s effort seemed “pretty determined,” Nigel Rendell, an economist at RBC Capital Markets in London, said in a telephone interview. For eastern Europe, it will help “at the margin.”
The Swiss franc’s appreciation against the forint and the zloty hurt economic growth and the difference from the level of intervention to records of 272 forint and 4.13 zloty isn’t enough to ease the burden on consumers and boost their confidence, Rendell said.
“Just because we’ve seen a big move in the exchange rate it’s not going to encourage people to go out and start spending,” Rendell said. “It’s not going to change the fundamental story and the need for some additional measures to try and help the problem.”
Hungarian central bank President Andras Simor offered 10 proposals to Economy Minister Gyorgy Matolcsy to “gradually” reduce the burden on foreign-currency mortgage holders while protecting financial stability when the two met today to discuss the issue, the bank said in an e-mail.
The Swiss move is “not a game changer” for the region’s banks, Hadrien De Belle and Magdalena Stoklosa, Morgan Stanley analysts based in London, wrote in a research note today, reiterating their “underweight” recommendation on OTP Bank Nyrt., Hungary’s largest bank, and PKO Bank Polski SA, Poland’s No.1 lender.
Non-performing loans among franc-denominated mortgages are set to rise further even at the current exchange rate from more than 10 percent in Hungary and below 2 percent in Poland, De Belle and Stoklosa wrote.
Western lenders including Unicredit SpA, Erste Group Bank AG, Raiffeisen Bank International AG and Bayerische Landesbank have 80 billion Swiss francs ($101 billion) of household debt in eastern Europe, according to UBS Wealth Management.
Austrian banks alone have provided 18.3 billion euros ($25.7 billion) of franc loans to their eastern neighbors, according to the country’s central bank.
“We welcome every action that aims at limiting an excessive overvaluation of the Swiss franc versus the euro and other currencies,” said Michael Palzer, a spokesman for Vienna-based Raiffeisen. “This step will help ease the pressure on borrowers and the financial industry.”
Hungary yesterday cut its forecast for economic expansion this year to 2 percent from a previous 3.1 percent. The government sees 2 percent growth next year, Matolcsy said.
The economy stalled in the second quarter as an export-led recovery lost steam and consumer spending remained subdued after the Swiss franc gains eroded purchasing power. GDP was unchanged from the previous three months, while the pace of expansion slowed to 1.5 percent compared with the same period of last year from 2.5 percent in the first quarter.
Poland’s pace of expansion may decelerate to 2.9 percent after the economy grew 4.3 percent last quarter from a year earlier, according to Citigroup Inc. Consumer spending slowed to 3.5 percent from the January-March period’s 3.9 percent.
“We do not expect” the SNB’s rate cap “to provide much relief to stretched household budgets or to boost domestic consumption,” Darren Middleditch, an emerging-markets economist at London-based Capital Economics, wrote in an e-mailed note to clients yesterday. “The implied exchange rate is still pretty high.”
Both Hungary and Poland adopted measures to fight the problem of franc appreciation and limit the threat to the banking industry and the economy. In Poland, the financial regulator ruled in January that monthly payments on foreign currency-denominated loans can’t exceed 42 percent of a customer’s net income.
Positive Impact ‘Unlikely’
Hungary’s government agreed with lenders in May to offer household borrowers who aren’t late with repayments the chance to fix a franc exchange rate of 180 forint until the end of 2014. Fitch Ratings in June said the agreement was “unlikely to have a material, long-term positive impact on households’ ability to service their debt.”
The difference between the fixed-rate payments and those that would have been made at the actual exchange rates will be recorded in forint accounts to be settled at a future date.
The benefit of yesterday’s SNB decision is that it reduces the cost to the public accounts of providing the exchange rate subsidy and the lower franc rates will ease pressure on foreign-currency reserves, wrote Capital’s Middleditch.
The Swiss decision “is helpful of course, but not a panacea” for eastern Europe, Pasquale Diana, an economist at Morgan Stanley in London, wrote in an e-mailed note yesterday.