Austrian, Polish Borrowers Face Franc Hit Hungary Dodged

Borrowers in Austria and Poland watched their Swiss franc mortgages swell when the Swiss National Bank dropped its cap on the currency, a surprise move that’s reversing the fortunes on what were once cheap loans.

The SNB decision to abandon the cap against the euro is hitting borrowers in the European countries where franc-denominated mortgages became popular as a way of borrowing before the financial crisis. Shares in Polish, Hungarian and Austrian banks plummeted.

Polish homeowners owed mortgages equivalent to 131 billion zloty ($35 billion) in Swiss francs by Nov. 30, while Austrian borrowers owed 25 billion euros ($29 billion) at Nov. 30. Hungary is in the process of swapping the outstanding 3.3 trillion forint ($12 billion) of foreign-currency mortgages into local tender, a key campaign pledge of Prime Minister Viktor Orban.

“Hungary’s decision to cut the country’s FX debt exposure was proven right by the Swiss central bank’s step today,” Hungary’s economy ministry said in an e-mailed statement. “By fixing the conversion rate we have shielded borrowers from a jump of about 500 billion forint in their debt.”

The franc traded 14 percent higher against the euro, 15 percent against the zloty and 15 percent against the forint after the SNB said today it would no longer keep the franc above 1.20 francs for the euro.

Low Rates

PKO Bank Polski SA, Poland’s biggest bank, fell 7.6 percent at 3:50 p.m. in Warsaw to 33.60 zloty and mBank SA dropped 6.9 percent to 465.95 zloty. Hungary’s OTP Bank Nyrt fell 2.6 percent to the lowest since 2012, while Austria’s Erste Group Bank AG was down 2.7 percent.

Regulators have sought to wean eastern Europe off foreign-currency loans since the practice pushed some countries to the verge of default during the credit crisis. While such loans offer borrowers in emerging economies lower interest rates, they can lead to soaring payments if local currencies slump, as they did in Hungary, Poland, Romania and Ukraine.

While Poland’s stock of franc mortgages is among the biggest, regulators limited borrowers’ risk by forcing banks to tie the interest rates on franc loans to those of the SNB, which cut negative interest rates lower today.

‘Unnecessary Panic’

“There is unnecessary panic,” said Marcin Jablczynski, a Warsaw-based analyst at Deutsche Bank AG. “Swiss franc borrowers may suffer from the zloty slump, but at the same time they benefit from negative Swiss interest rates.”

In Hungary, lenders must convert all foreign-currency household mortgages to forint this year. The conversion rate was set at 308.97 forint per euro and 256.6 forint per Swiss franc in a law last year. Only a small portion of mostly car loans don’t have fixed forint conversion rates yet, according to central bank data.

Hungary’s central bank sold 8.43 billion euros from its foreign-currency reserves to banks for the loan conversion process in November and said this would cover banks’ needs. Erste and OTP said today they didn’t see a hit from the franc spike.

Austria, Greece

“All domestic banks secured the necessary Swiss franc amount for the loan conversion by the end of 2014,” the Hungarian central bank said in an e-mail today.

“Theoretically, banks don’t keep open FX positions, the rule would be that they hedge their EUR/CHF positions,” said Attila Gyurcsik, an analyst at Concorde Securities in Budapest. “It seems that Hungary has just avoided the brunt of this blow, banks may be able to avoid a very negative impact.”

Among the developed economies where franc loans were common are Austria, whose banks are also among the largest lenders in Hungary and Romania, and Greece, where 8.5 billion euros in franc-denominated loans were outstanding Sept. 30.

In Austria, losses may be exacerbated because a large share of the mortgages are bullet loans, linked to funds that have lost money and that will probably leave them with a shortfall at maturity, the central bank has said.

“The Austrian central bank in principle doesn’t comment other central banks’ monetary policy,” the central bank said in an e-mailed statement. “But it has to be said that the measures taken by the SNB are of a significant relevance.”

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