Polish Central Bank Blasts Foreign-Loan Plan as Stability Risk

  • Banks face $11 billion in costs from President's mortgage bill
  • Large-scale loan conversion may cut Poland's credit ratings

Poland’s central bank gave a scathing assessment of the President’s proposal to convert foreign-currency loans into zloty, piling pressure on the ruling party to amend the draft legislation or risk destabilizing the financial industry.

President Andrzej Duda’s plan, if implemented, would cost banks 44 billion zloty ($11.2 billion), or about four years of profit, while pushing 70 percent of the nation’s lenders into the red, the central bank said in a financial stability report on Wednesday. The WIGBank index of the country’s lenders advanced 1.1 percent to a four-week high at 1:14 p.m. in Warsaw, paring its year-to-date drop to 5.4 percent. The gauge tumbled 24 percent last year.

“Following this report, the chances are rising that the plan won’t be introduced in its current shape,” said Marta Jezewska-Wasilewska, a Warsaw-based analyst at brokerage Wood & Co. “This explains why banking stocks aren’t falling.”

The financial industry is one of the main battlefields for Poland’s new government, which is also confronting retailers and has clashed with European leaders over its overhaul of institutions including the constitutional court and public media. Besides the loan-conversion plans, which central bank Governor Marek Belka called “pure evil” last month, commercial lenders are subject to a new tax that will siphon off about a third of the industry’s annual profit.

The central bank said the large-scale conversion of foreign-currency mortgages, which amount to the equivalent of $42 billion, could lead to depreciation of the Polish currency, negatively affect public finances and reduce the sovereign’s credit ratings. Besides the costs of converting loans and repaying clients for currency spreads, as proposed in the draft legislation, lenders also face the additional burden of insuring their foreign-currency exposure, it said.

Mortgage Mismatch

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.

The draft law 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 president’s office has deferred to country’s financial market watchdog to calculate the cost of the proposal, which is currently awaiting debate in parliament. The central bank is the first public institution to put a price tag on the proposal in its report on Wednesday.

“It’s our legal obligation to send a signal about potential risks,” central bank board member Andrzej Raczko told reporters in Warsaw, when presenting the report. “Everyone is focusing on the consequences that this conversion could have for bank profits, but it’s a piece of a bigger puzzle, which could have a serious knock-on effect for the entire economy.”

Getin Noble Bank SA, Bank Millennium SA, MBank SA, PKO Bank Polski SA and Banco Santander SA’s Bank Zachodni WBK SA are among those with the most exposure to foreign-currency loans, Wood & Co.’s Jezewska-Wasilewska said.

The central bank’s 44 billion-zloty cost estimate for the plan could grow by an additional 20 billion zloty if borrowers whose property values have fallen below the value of their loans decide to cancel their mortgages, which would be possible under Duda’s proposal.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE