Another Eastern European meltdown? | FT Alphaville

Another Eastern European meltdown?

Recent swiss franc strength has started to court some concern at the Swiss National Bank. Reuters reports SNB board member Thomas Jordan in particular voiced his worries on the swissie’s recent 7 per cent rise against the euro. The move is bad for Switzerland because the country depends on competitive trade with the rest of Europe.

Accordingly, hints from Jordan that the SNB may be prepared to intervene in markets if needed to stimulate the economy have resulted in some welcome weakness in the franc Thursday and Friday.

EUR/CHF courtesy of CNBC

Be that as it may, it has not soothed tensions in one particularly CHF-exposed European nation – Poland.

As can be seen in the chart below, the CHFPLN cross-rate is setting fresh four-year highs, quashing even those set in October — which originally triggered alerts about ubiquitous Eastern European exposure to swiss franc-denominated mortgages. Swiss franc and euro mortgages, ironically, were issued en masse to downsize borrowers’ forex risk – the expectation being that the zloty would only strengthen due to European Union integration. The side-effect was that during the Polish zloty’s rally of the last few years, many borrowers were given a false impression of growing personal wealth. With the reversal, comes the opposite — mortgage repayments are just not as affordable as they once were.

Just to give a dimension to the problem, TD Securities estimates up to PLN88bn was lent to Polish borrowers in the form of foreign currency-denominated mortgages. That’s a lot for Poland, a relative newcomer to mortgage borrowing.

CHFPLN courtesy of

It was this sort of exposure that actually alerted many of the credit rating agencies to problems at the likes of Allied Irish, which were heavy lenders into Eastern Europe exactly on those terms. Other banks with big exposure include Unicredit and the Austrian banks.

NOTE:  See comment below.

To settle the market back in October, the Polish government stopped dithering on euro-adpotion and said it would accelerate the process to join the single currency by 2012. But that’s slightly different to its current tune, note this Reuters story on how it’s now justifying a possible delay. Meanwhile, the National Bank of Poland initiated ECB and SNB swaps facilities to cut the shortfall of swiss francs and euros in the Polish market, something it now says it will have to continue until at least April:

Jan. 16 (Bloomberg) — The National Bank of Poland said it will continue to cooperate with its Swiss counterpart and the European Central Bank to boost liquidity “in short-term Swiss franc money markets” until at least the end of April. “Today, the SNB, the ECB and the NBP are jointly announcing that they will continue these one-week euro/Swiss franc foreign-exchange swap operations at least until the end of April to support further improvements in the short-term Swiss france money markets,” the Polish central bank said in a statement from Warsaw.

All of the above is causing no end of jitters, with some analysts predicting the CHFPLN cross rate could reach 3.00 within weeks, if not days. While TD Securities sees some light within the gloom, they too, note the unsettling forex exposure, especially as economic indicators worsen across all fronts. As they put it on January 7th (our emphasis):

We still see considerable risks for CEE currencies as export activity collapses and disposable income is hit by higher repayments on fx mortgages but the short-term momentum remains very strong and we think that it could drive the rate to 3.80 in the coming weeks. We are of the opinion that from the fundamental point of view the Zloty is undervalued. Interestingly, the difference now seems to be a mirror image of the overvaluation in mid-2008. Note, however, that REER does not take into account turbulences on the fx market, which constitute the biggest risk for the currency at the moment. On the relative value side, we favour PLN/HUF going towards 69.50 from currently 67.25.

Their end Q1 target for EUR/PLN remains at 4.30.

But there’s another problem too – the extent of the credit binge that took place in Poland. Polish business daily Puls Biznesu alerts on Friday that banks had a totally skewed perspective of credit worthiness, something the government is now trying to regulate.

The paper quotes the government finance commission as saying it’s not even because of the crisis, rather they want to introduce normal business practises (suggesting banks’ practises to date have hardly been normal).

In its initial findings, the commission says it believes evaluation of creditworthiness has been too variable. In (bad) examples it cites the case of a woman on a 1126-zloty monthly salary (some £240) and undergoing psychiatric treatment, approved for 14 various bank loans and a student, working for only one month on a free-lance contract, earning a total of 1,200 zlotys (£256) and receiving a 40,000 zloty (£8,854) bank loan.

All a bit worrying.

Related links:
The EE mortgage – FT Alphaville
The big Le-borrow-ski – FT Alphaville