Swiss Franc Surge Hits Eastern European Borrowers Again

Swiss franc bounces to all-time high against zloty

On Thursday morning, the franc shot up to over PLN 5.19, the highest exchange rate of the two currencies in history. By the afternoon, the rate had settled at around PLN 4.23, however.
The market response was caused by the Swiss National Bank, which discontinued its minimum exchange rate to the euro, which was at CHF 1.20.

This is very bad news for borrowers.

Eastern European Currencies Dive as Swiss Loan Costs Hurt Banks

The Swiss National Bank’s unexpected decision to scrap its minimum exchange rate will elevate the cost of paying off loans, including mortgages, in francs. Poles and individuals in countries such as Hungary and Romania borrowed francs in the run-up to the 2008 financial crisis because the interest rates were cheaper, only to get stuck with higher financing costs as price swings accelerated.

“This will be a painful year for Polish households with Swiss franc loans,” Piotr Matys, an emerging-markets foreign-exchange strategist at Rabobank International in London, said by e-mail. The zloty’s weakening “might fuel concerns about financial stability in Poland,” he said.

Swiss franc shock triggers mortgage panic for wealthy homeowners

"While there won't be many people who have newly taken on such mortgages, there will still be some who hold that debt," he said. "Following falls today, these loans will be 12pc more expensive."

Swiss franc denominated mortgages are held by property investors across the world with many Chinese, Middle Eastern and Russian buyers parking money in Switzerland to purchase a second homes in luxury destinations such as Monaco.

Hungary may be insulated. One reason why the Fidesz party has been popular is that it sided with Hungarian borrowers against foreign banks.

From summer 2014: Hungary's Currency Weakens on Government Plan to Convert Loans

The forint weakened as implications of the government's plan to convert foreign-currency loans into forints at below-market rates sunk in, said Peter Attard Montalto, economist at Nomura.

"The market's finally waking up to the fact that the government is doing this, regardless of what the banks think," he said.

Today:
Swiss franc surge hits emerging Europe bank sector

Hungary already got ahead of the curve last year by fixing exchange rates for many borrowers who had taken out mortgages in Swiss francs to capitalize on low interest rates, only to lose out when the franc surged during the financial crisis.

The banks that issued those loans had to pick up the bill for fixing the rates, but a Hungarian market source said they were safe too because they had already converted their Swiss francs into forints last year and closed their positions.

"God is with us," the market source said, when asked about the timing of the conversion.