• Central bank chief Belka calls plan `recipe' for crisis
  • Loan proposal puts zloty under `material risk,' Erste says

The Polish president’s draft legislation to convert $42 billion in foreign-currency loans into zloty is a “recipe for a banking crisis” that could weaken lending and economic growth, according to central bank Governor Marek Belka.

“It’s pure evil,” Belka told TVN24 BiS news channel in an interview on Tuesday. “A significant number of banks, mostly Polish ones, will suffer serious losses. Directly or indirectly, we’re going to foot the bill in the form of slower loan growth and a destabilized economy.”

Marek Belka
Marek Belka
Photographer: Piotr Malecki/Bloomberg

President Andrzej Duda last week proposed a draft law that would make banks accept repayments on the equivalent of almost 8 percent of Poland’s gross domestic product in foreign-currency mortgages at a “fair” exchange rate, unless a voluntary agreement is reached. The planned legislation comes after the ruling Law & Justice party imposed a new levy on bank assets that will drain 4.4 billion zloty ($1.1 billion) from lenders, or about a third of their profits from the last 12 months.

Belka said the Finance Ministry should stall on sending the bill to parliament as it would be “especially ugly for the budget” and could further weaken the banking industry at a time when lenders are facing the new levy on assets. Details of the proposal require further study, although banks will most likely be able to spread losses from fixed mortgage payments over time, the ministry said in a statement on Monday.

Zloty Slump

Poland is following other eastern European countries that moved to convert mortgages denominated in foreign currencies, including in Swiss francs, after they proliferated prior to the 2008 financial crisis. While allowing many borrowers to take advantage of lower interest payments, the loans exposed them to currency swings that could destabilize the banking industry, according to Poland’s financial markets regulator.

The zloty slumped to a four-year low on Friday as concern that the legislation would force banks to purchase billions of euros and Swiss francs to cover their exposure was compounded by the country’s first sovereign-rating downgrade by Standard & Poor’s.

“There is material risk for the Polish zloty stemming from uncertainty about the setting of a ‘fair exchange rate’ for the conversion of FX loans and whether the central bank will be willing to support the unwinding” of such funding with the country’s foreign-currency reserves, Juraj Kotian, head of macro-economic and fixed-income research for central and eastern Europe at Erste Group Bank AG in Vienna, said in a research note on Tuesday.

The bank lowered its forecast for the Polish currency at the end of 2016 to 4.47 per euro, compared with an earlier 4.22 view. The zloty gained 0.3 percent to 4.4459 against the single European currency at 11:58 a.m. in Warsaw, paring its year-to-date decline to 4.2 percent, still the fourth-worst performance among emerging-market peers tracked by Bloomberg following the South African rand, Russia’s ruble and Mexico’s peso.

Social Problem

Repayment became harder for Poland’s foreign-currency borrowers after Switzerland scrapped the cap on its currency a year ago. While it cost less than 2 zloty to buy one franc in 2008, it costs more than 4 zloty now. The “fair” exchange rate proposed by the president will be set individually and calculated by comparing the cost of foreign-currency loans to those taken out in zloty. The borrower will also be allowed to hand over property to cancel the mortgage without additional costs.

Belka said he’s against any quick-fix solutions for the nation’s foreign-currency mortgage issue, especially since this hasn’t become a “social problem” as delinquency rates on such loans remain lower than on other types of debt. “Have we heard of Swiss-loan borrowers going through personal-bankruptcy procedures on a large scale? No.”

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