 A woman looks at properties for sale at A1 real estate agent's in Budapest, Hungary, in this file photo. Some household borrowers in central and east Europe are suffering from the surge of the Swiss franc. Bloomberg photo |
The Swiss franc's unprecedented strength in recent months has left Switzerland's exporters reeling, but another less obvious group is also suffering: household borrowers in central and east Europe.
Over the past decade, local banks offered them small loans or mortgages denominated in Swiss francs to counter the high interest rates offered on loans against their weak domestic currencies or the euro.
By the first quarter of 2010, Swiss currency loans accounted for 34.3 percent of those to the non-banking sector in Hungary, 20 percent in Poland, 13 percent in Croatia and even 13.6 percent in Austria, according to research by UBS.
That was enough to prompt warnings from the International Monetary Fund, or IMF, as well as Hungary's central bank and financial regulator, late last year on the impact of a further appreciation of the franc on the country's fragile economy.
"Domestic demand will suffer if the Swiss franc, whose value directly impacts households' debt servicing costs, strengthens further," the IMF said in October.
While the lending trend helped sustain the consumption boom in eastern Europe for a while, the cost of repaying Swiss franc loans then soared through the recession with volatile exchange markets, in some instances doubling in two years.
"As a counterparty for lower interest rates, they exposed themselves to exchange rate risks," said Marcus Hettinger, a currency specialist at Credit Suisse.
Eastern Europeans started to feel the sharp end of currency volatility in 2009, when the Swiss currency was at the heart of speculative carry trades that pushed up its value.
Between August 2008 and mid-2009, it appreciated by more than 30 percent against the Polish zloty and Hungarian forint, and the more recent surge since 2010 has added to the pressure.
An indebted economist
"I took out a 25 year loan of 46 million forints (164,591 euros) in 2007, the monthly repayments were then 260,000 to 280,000 forints a month (1,000 euros)," Vilmos Mueller, a 38-year-old Hungarian economist, told Agence France-Presse. "Today, having paid back 11.8 million forints, I still owe the bank 59 million forints and the monthly repayments exceed 430,000 forints."
The pattern of franc lending in central Europe also coincided with a period when the Swiss currency was undervalued, enhancing its short-term attraction.
In volume terms, Polish borrowers were the most hungry, taking out 53 billion Swiss francs, followed by Hungarians (36 billion francs) and Croatians, according to UBS.
Those countries have tried to rein in the trend, paring back non-bank loans from 389 billion francs in the third quarter of 2008 to 345 billion in the first quarter of 2010.
In Poland, where about 600,000 households have such loans, the financial regulator twice advised banks last year to limit their franc loans.
Hungary, meanwhile, has imposed a moratorium until April 15 to stop families unable to keep up with loan repayments from being expelled from their homes.
Austria's financial markets authority had already advised banks not to trade such loans and by March 2010 it had imposed restrictions.
Several Croatian banks have meanwhile reduced their interest rates or offered to convert them to euros.
"New franc credit lines are rare, but the overall amount is high, and that could create problems in the long term," Hettinger said.
Hungary's financial supervisory authority noted that defaults in franc mortgages increased by mid-2010 and said there was a "reasonable threat" they would rise again.
UBS analyst Thomas Flury predicted that the "worst is over" with the Swiss franc's rise, but he cautioned that deeper trouble in the eurozone would continue to drive it up.
Over the past decade, local banks offered them small loans or mortgages denominated in Swiss francs to counter the high interest rates offered on loans against their weak domestic currencies or the euro.
By the first quarter of 2010, Swiss currency loans accounted for 34.3 percent of those to the non-banking sector in Hungary, 20 percent in Poland, 13 percent in Croatia and even 13.6 percent in Austria, according to research by UBS.
That was enough to prompt warnings from the International Monetary Fund, or IMF, as well as Hungary's central bank and financial regulator, late last year on the impact of a further appreciation of the franc on the country's fragile economy.
"Domestic demand will suffer if the Swiss franc, whose value directly impacts households' debt servicing costs, strengthens further," the IMF said in October.
While the lending trend helped sustain the consumption boom in eastern Europe for a while, the cost of repaying Swiss franc loans then soared through the recession with volatile exchange markets, in some instances doubling in two years.
"As a counterparty for lower interest rates, they exposed themselves to exchange rate risks," said Marcus Hettinger, a currency specialist at Credit Suisse.
Eastern Europeans started to feel the sharp end of currency volatility in 2009, when the Swiss currency was at the heart of speculative carry trades that pushed up its value.
Between August 2008 and mid-2009, it appreciated by more than 30 percent against the Polish zloty and Hungarian forint, and the more recent surge since 2010 has added to the pressure.
An indebted economist
"I took out a 25 year loan of 46 million forints (164,591 euros) in 2007, the monthly repayments were then 260,000 to 280,000 forints a month (1,000 euros)," Vilmos Mueller, a 38-year-old Hungarian economist, told Agence France-Presse. "Today, having paid back 11.8 million forints, I still owe the bank 59 million forints and the monthly repayments exceed 430,000 forints."
The pattern of franc lending in central Europe also coincided with a period when the Swiss currency was undervalued, enhancing its short-term attraction.
In volume terms, Polish borrowers were the most hungry, taking out 53 billion Swiss francs, followed by Hungarians (36 billion francs) and Croatians, according to UBS.
Those countries have tried to rein in the trend, paring back non-bank loans from 389 billion francs in the third quarter of 2008 to 345 billion in the first quarter of 2010.
In Poland, where about 600,000 households have such loans, the financial regulator twice advised banks last year to limit their franc loans.
Hungary, meanwhile, has imposed a moratorium until April 15 to stop families unable to keep up with loan repayments from being expelled from their homes.
Austria's financial markets authority had already advised banks not to trade such loans and by March 2010 it had imposed restrictions.
Several Croatian banks have meanwhile reduced their interest rates or offered to convert them to euros.
"New franc credit lines are rare, but the overall amount is high, and that could create problems in the long term," Hettinger said.
Hungary's financial supervisory authority noted that defaults in franc mortgages increased by mid-2010 and said there was a "reasonable threat" they would rise again.
UBS analyst Thomas Flury predicted that the "worst is over" with the Swiss franc's rise, but he cautioned that deeper trouble in the eurozone would continue to drive it up.
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