• Bank turns underweight zloty, market-weight local bonds
  • Proposal to convert foreign-currency loans weighs on zloty

JPMorgan Chase & Co. recommended selling the zloty on speculation a plan to convert foreign-currency mortgages will further increase risks, following Poland’s first-ever sovereign downgrade.

The largest U.S. bank by assets moved to an underweight recommendation on the zloty in its emerging-market portfolio, in line with its view on sovereign credit, according to JPMorgan analysts including Jose Cerveira in London. Local bonds were cut to marketweight from overweight.

Poland’s currency is the worst performer after Russia’s ruble in developing Europe this year as the government, which was elected in October, pushes ahead with strengthening its control over institutions and plans to tax banks to increase social spending. The president’s office rolled out a plan last week to convert Swiss franc mortgages into zloty to help protect Poles from rising loan charges, a move that JPMorgan estimated carries a cost equal to two years of banks’ profits.

“Proposals to convert foreign-exchange mortgages carry meaningful foreign-exchange risks, which the market appears to currently underestimate,” the analysts wrote in a report dated Jan. 20. “Together with political uncertainty and rising risk premia, this underpins our move to a bearish stance on the currency.”

Shock Downgrade

Standard & Poor’s unexpectedly downgraded Poland one step to the third-lowest investment grade on Jan. 15, citing concern over the independence of key institutions. The Law & Justice-led government has sought to strengthen control over the constitutional court and public media, which drew criticism from the European Commission.

Under the current draft for converting loans, the banks would bear losses of about 24 billion zloty ($5.8 billion), JPMorgan said. Central bank Governor Marek Belka, whose term ends in June, said it’s a “recipe for a banking crisis” that could weaken lending and economic growth.

Converting the equivalent of $42 billion of foreign-currency mortgages into zloty at a so-called fair rate would be “devastating” for Poland’s financial system, said Krzysztof Pietraszkiewicz, head of the Polish Bank Association.

The zloty was little changed at 4.4898 per euro at 3:18 p.m. in Warsaw, after falling to a four-year low of 4.5120. The currency has dropped 5.1 percent this year.

The premium investors demand to hold Polish 10-year bonds over similar German bunds was little changed at 269 basis points on Thursday after briefly rising to an almost two-year high of 271 basis points earlier on the day.

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