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Swiss Franc and the possibility of huge mortgage defaults in Central Europe
From www.thetrader.se
Ordinary people don’t think in such terms, and definitely did not hedge that exposure. With the ever increasing strength in the Swiss Franc, people with mortgages in Swiss Francs are starting to feel the currency effect big time. Since such a big proportion of the mortgages are taken out in non domestic currencies, people are squeezed. Could the Swiss Franc increase the debt repayments of the mortgages, and ultimately cause huge defaults in these countries? Exotic Currency risk by retail…..Courtesey Stratfor.
Historically low interest rates on loans in Swiss francs have led consumers in major Central European countries such as Poland, Slovakia, Hungary and the Czech Republic to acquire substantial loans, particularly mortgages, in francs. Currently, 53 percent of outstanding mortgages in Poland and about 60 percent of those in Hungary are denominated in francs.
The franc’s perceived stability amid growing eurozone troubles has strengthened it considerably in comparison to the euro and Central European currencies. This is not only worrisome to the consumers in the countries with significant franc-denominated debt, who now struggle to service their increasing debt load, but also for financial institutions that hold significant assets in Central Europe, such as that of Austria.
While new homeowners in Poland and Hungary have shied away from franc-denominated loans since the franc’s strengthening in the wake of the beginnings of the eurozone sovereign debt crisis in early 2010, the franc has traditionally been considered a stable currency with low associated interest rates and therefore a good alternative to the euro. The majority of Polish and Hungarian mortgage purchasers before 2008 took out their loans in francs at a time when, due to the economic dynamism of the emerging Polish and Hungarian economies, the zloty and forint were relatively strong in relation to the Swiss franc. The franc traded for 160 forints before the crisis; it currently trades for 224, a 40 percent increase. Similarly, the franc traded for 2.1 zlotys in July 2008 before jumping 57 percent to currently trade at 3.3. Moreover, the fluctuation in the zloty or forint value of the Swiss-denominated loan proportionally increases the debt repayment value. The compulsory nature of making a mortgage payment (the failure to pay one’s mortgage will eventually result in losing one’s home) means that debtors are unlikely to default despite the increase in monthly mortgage payment value. However, debtors are also likely to drastically cut all other spending when faced with the risk of default, thus undercutting domestic consumption — a major driver of the Polish economy in particular.
The situation is not necessarily as alarming as some reports from Poland and Hungary claim. Central European governments have begun implementing stabilization measures to reduce the risk to mortgage owners. The Hungarian parliament approved a legislative package June 10 that included fixing the exchange rate on franc-denominated mortgage repayments at 180 forints. Hungary is also considering implementing a program that would buy back a defaulting property and take in its owners as tenants. Poland has thus far taken a passive role on the issue but has declared itself willing to intervene should mortgage defaults become imminent. Moreover, Switzerland itself has an incentive to devalue its currency, mainly to ensure that its large export sector remains competitive. To a certain extent, the Swiss government can mitigate the rise of the franc by purchasing foreign currency, particularly euros, driving down the demand for francs. The problem is that Switzerland has already been undertaking such an effort since the start of the eurozone crisis and yet the franc has still appreciated considerably.
However, a major economic event in the eurozone — such as a Greek default, Spanish banking problems, or the brewing political crises in Italy and Spain — could cause the franc to skyrocket in relation to both the euro and currencies such as the zloty and the forint. Such an increase could be so large that even the Hungarian and Polish governments would be unable to avoid massive domestic defaults on mortgages and Switzerland would be powerless to offset its strengthening currency. Homeowners with mortgages denominated in Swiss francs would find themselves unable to repay the value of the appreciated loan in their domestic currency and would be forced to defau
This certainly would not bode well for Europe, especially Austria. The 2008 financial crisis started in Europe when the collapse of Lehman Brothers triggered a massive capital flight away from Central Europe, and a mortgage crisis in Hungary or Poland could potentially replicate these triggers, leading to contagion across the Continent. Austria, could act as the gateway for the crisis into the eurozone. The Austrian financial sector would have to incur these losses, potentially forcing Vienna to bail out its banks, focusing the markets and investors on Austria itself.
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If any government would like to help people seriously, they should make bankruptcy easier. We should decouple real estate mortgage from personal responsibility living bank with only a home a collateral. This would have three positive effects:
1) It would allow people to default and buy cheaper homes later.
2) Massive defaults would lower demand for swiss franc and lower burden on anyone holding on.
3) It would discourage banks for making bad loans in the future.
Bonus point: many banks would be busted, witch is always a good sign :-)
But governments do not represent people, but banks. So they borrow from banks to found exchange-rate burden for bad loans. It will, as always, end with bankruptcy of governments (I intentionally don't use the word "sovereign" here).
Here are more links about the situation of Austria's banks:
Austrian Banks Get Dressed Up, Slash Loss Provisions (And More ...
Update On the (Bad) Situation of Austrian Banks
Austrian Banks Carry €2.6 Trillion in Derivatives - Risk Unknown ...
Austrian Banks May Be Less Stable Than Their Figures Show
Mind the Capital Gap: No Relief for Austria's Banks
Austrian Banks Have Biggest Exposure in Hungary - Top Bankers Meet ...
A Detailed Overview of CEE Bank Players
...and don't forget we have the Finns and Slovakia rather negative about saving Greece. The Finns want collateral (how strange) and Slovakia isn't really up for helping Greece, due to own problems. although both these countries are small, it is not getting the countries United, but of course, one needs to read some European History to understand this....Europe is not the United European Nations
and the italian lender unicredit is on the hook via it's Austrian subsidiaries
Well done, a fresh piece of research.
What a very important post.
The financial markets will enter the doomsday phase soon, i am looking at the next mth, anybody else?
You seem to understand this is not a old story, as the Swiss Franc is moving realtime, and people are suffocating. This could really spread throughout central/eastern Europe, but the readers above haven't read too much European History...and no, in Europe you can't leave the keys to the bank and say goodbye
While I am not certain if that comment were directed at me but I would submit that reading history has nothing to do with anything. Neither Charlemagne, Pope John, Napoleon or even Wellington have ever seen any of this before. We are in uncharted territory and a glossary of ancient European trivia won't help here.
The only response to bad loans by any bank anywhere in the world has been to gobble them up until you can't take any more; that is, until they can't. We'll see what happens when the banks reach their fill.
Trader,
Actually, I do not know much European history, although, I have read some, probably, revisionists interpretations.
If you have a few minutes, perhaps you might amplify your comments a wee bit.
thanks
Ah yes...another bubble...in Francs even...
Been a little while since there was trouble in Europe, how many generations?
yes...this an old story...CHF loans to newly de-regulated economies were common in the 1980s too...with the same disastrous results.
So, just who is at fault?
It would be an old story if all the loans were paid off and were not still securitized, in Europe.
the result now will be complete balkanization of the eurozone.
"Why write again of something that we have read a half a dozen time over the last five years?"
Exactly my thought when I first saw the article, hence my opinion that with the Swissie turning lower, it would make "bank" for TPTB if they could frighten enough people into switching their mortgage financing now.
I don't know the author but something tells me that this article is at best mischaracterising the situation and at worst is a deliberate attempt at shilling the bankers' line.
:D
Thanks, Orly
It could be either, neither, both, plus the unknown; who can say a word about these things?
Certainly not an old man lost in the shadows.
i'M SORRY, BUT IF THIS NOT A 'NON-STORY' IT IS AT BEST AN OLD STORY.
Why write again of something that we have read a half a dozen time over the last five years?
The homebuyers there will simply do as we are doing----stay until they are thrown out.
I mean it was agood deal when the trade was made and now no one needs an excuse like
justice' and 'fairplay' to renege on it if he chooses to do so.
This is a faultless deal on all sides-----and if I were a banker I would have made every deal I could have in CHF; I've been long in my own meager way since 2005----
Sorry to whine so-----but we have enough on our plate without anymore "what ifs'
My Hungarian associates have been screaming bloody murder for almost two years now. It is no news that Austria still faces significant threats from a Central European private sector default wave, just as Sweden is facing similar issues with the Baltic states, most notably Estonia at present.
In these segments of the global economy 2011 my well be a repeat of 2009 rather than 2010 as looks to be the case in the US.
Austria did much right out of the gate to lessen the effects of Franc-denominated exposure by nationalising a large bank and also nationalising other mortgage tranches from some other banks in late-2009.
http://www.creditwritedowns.com/2009/12/bank-collapse-in-austria-brings-...
http://prudentinvestor.blogspot.com/2009/12/paper-austria-may-nationaliz...
It seems that most of the damage is already done, as the Swiss Franc has made long-term bullish Gartley patterns on several xCHF crosses on weekly charts over the past three weeks or so. Trading a franc-denominated loan now for one denominated in Euros would not be very wise.
Maybe that's why they mention it...
It seems that most of the damage is already done, as the Swiss Franc has made long-term bullish Gartley patterns on several xCHF crosses on weekly charts over the past three weeks or so. Trading a franc-denominated loan now for one denominated in Euros would not be very wise.
Orly,
I don't know anything about Gartley patterns, But I imagined the p&f count on CHF in 2001 and came up with $10 to one frank as an objective.
Of course, I am mad, so I rarelt mention this to anyone. Besides, if it even goes to $2 to 1 chf the physical will be the only way to ride it out except for CHF denominated stocks or bonds. I doubt if any financial entity will deliver the physical at such a time, but rather a journal entry to a larger currency will have already occurred---------------it seems almost like gold in my imagination.
thanks for the confirmation of a possible big move
Morons.... The interest rate on a loan, or a bond (bought or issued) does not depict the future total return of the instrument, as expressed in local buying power. Such is the nature of fiat money.
Much like the stories that went around for the past 5-10 years saying that Japanese interest rates (at 0%) are low -- sure, the interest rate might be low, but someone borrowing in Yen is obligated to repay in Yen, and the implied interest rate due to currency appreciation could very well be significantly greater (and in the case of the Yen, was, as the Yen has gone from 120 to 80 in just a few years!).
Keep in mind that the CHF/Gold is roughly stable since a while.
What I mean is that those mortgages are behaving the same way as if they were in gold. Hard money is always hard on the debtor. Advocates of hard money usually don't mention this much.
IF the property keeps the same value, it could go all well for both sides.
That is a big "IF". I remain unconvinced.