On August 5th 2015, the Polish parliament – with a single last minute amendment – decided that banks would assume not just half, but a full 90% of all currency conversion losses associated with CHF-denominated private loans. Such a legislative package was expected in Poland, but everyone was surprised by the last minute amendment. In the mean time, the new legislation has not passed yet, since the Upper House has not yet approved it, all politicians being on well-deserved summer vacations.
The question is why did this measure generate such surprise among investors, the public at large as well as the press. Here are a few reasons, as we see it:
1) Investors have always considered Polish markets as more investor-friendly than Hungarian markets and this higher popularity explains partially why Polish securities tended in the past to be over-valued compared to Hungarian securities. As a result, though Polish politicians were expected to adopt measures similar to those adopted in Hungary, in the case of the pension fund system, Polish legislators remained more cool-headed than their Hungarian colleagues and decided to nationalize only half of the system, instead of the entire system like in Hungary. Based on this example, investors expectations were set that Polish policies with respect to the disposition of domestic loans in foreign currencies, would be far less damaging to the banking system than in Hungary. Unfortunately, it appears for the moment that they decided a much more radical course with a price tag of 19 bn zlotyi (USD … ) or approx. 18 months of the profit of the entire Polish banking sector.
2) The press has missed an enormous difference between the Polish and Hungarian banking sectors. Our colleagues from the Visegrad group experience a much higher level of competition among financial institutions and credits were therefore extended only at close to base rates. Due to the weakening of CHF, the reference CHF LIbor rate turned negative and monthly payments on such loans did not rise as substantially as in Hungary. Expenses grew an average of 20% instead of 100%.
[ Source: Goldman Sachs]
3) CHF-denominated personal mortgages represented ~20% of the Hungarian GDP, whereas the same type of loan represent only 10% of GDP. In Poland, the ratio of non-performing CHF-denominated loans represents only 2-3 %, whereas in Hungary this ratio exceeded 15%. As a result, a revaluation of the CHF was perceived by Hungarian monetary authorities as capable of triggering much wider social disruptions across the population than in Poland.
[Source: Goldman Sachs]
[Sources: Hung. Nat. Bank, Portfolio.hu
4) In Hungary too the question arose, why stop at CHF-denominated mortgages? Why not assist also other type of foreign currency borrowers? In Poland, the ratio of domestic currency loans to CHF loans is much higher than it ever was in Hungary. Should private borrowers in Zlotyi, start raising this topic in the press, things good become quite ugly.
5) These Polish measures put enormous pressure on the banking system and current accounting rules force the banks to write-off immediately these losses. This could trigger the closing of smaller banks that are not able to raise the appropriate capital coveral shortfall. By the way, it seems that wiht these measures the government has inadvertently put their market share leading bank, the PKO, into a very delicate situation, since it may become quite difficult to privatize the State’s leftover share in this institution.
It is true that the current draft legislation is also subject to hightened political speculation. Just before this Fall’s elections, it is likely that the current cabinet was probably calculating that “if we do not pass this draft legislation, it is likely that the opposition (PIS) will, at our expense”. The downside is that investors sensing heightened risks, started building new risks into their pricing models, the first and foremost being the likelihood of higher taxes on financial institutions. As a result, amidst all of this new uncertainty, banks will withhold credits, which in turn will sap the banking system from its vitality to fuel further growth in the economy.
Original article published in Hungarian in alapblog.hu
by Stein. Translation by Ertsei.