Low-Interest Loans in Swiss Francs Turn Calamitous as Zloty Tumbles
A Solidarity trade unionist held a banner during a demonstration in Warsaw this month. Defense workers rallied to demand that the government help save their jobs in downturn. (By Alik Keplicz -- Associated Press)
A Solidarity trade unionist held a banner during a demonstration in Warsaw this month. Defense workers rallied to demand that the government help save their jobs in downturn. (By Alik Keplicz -- Associated Press)WARSAW -- Like many of its formerly communist neighbors in Eastern Europe, Poland has turned into a country of capitalist gamblers.
In recent years, as their economy boomed, millions of Poles became foreign-currency speculators, buying property, cars and consumer goods with loans denominated in low-interest Swiss francs. As the Polish currency, the zloty, soared in value, most borrowers found it cheaper to pay off their debts in Swiss money, even though few had ever been to Switzerland or knew what a franc looked like.
Since August, however, the zloty has unexpectedly collapsed, losing nearly half its value against the Swiss franc. About two-thirds of all Polish mortgage holders now face skyrocketing payments. If the zloty continues to tumble, analysts fear the problem could lead to a wave of defaults in the region, dealing a major setback to Europe's already weakened banking system.
"Just like the subprime mortgages were a wonderful idea in the United States as long as house prices kept rising, so it was with the Swiss-franc loans here," said Witold M. Orlowski, a former adviser to the Polish president and now chief economist for PricewaterhouseCoopers in Warsaw. "It was seen as a win-win game. There were warnings, but basically people ignored them."
Currency gambling has backfired in several other countries in Eastern and Central Europe. In Hungary, Romania and Ukraine, a majority of mortgages and other consumer loans were taken out in Swiss francs, euros, even Japanese yen -- all of which offered substantially lower interest rates than the Eastern European currencies.
The borrowing binge rested on the assumption that the Hungarian forint, Romanian leu and Ukrainian hryvnia would keep rising in value, or at least remain stable. But since last summer, those currencies have crashed.
Moody's credit-rating agency warned last month that the region's financial system was vulnerable to defaults on foreign-currency loans and that the problem could devastate the balance sheets of Western European banks operating in the region.
German, Austrian and Italian banks dominate finance in Eastern Europe. U.S. banks are less exposed, but a few, including Citibank and General Electric's Money Bank, have a substantial market share.
In Poland, people owing money in Swiss francs have seen their monthly payments rise by 50 percent or more since last summer. Few have defaulted. But analysts predict the number of bad debts will jump if the zloty remains weak much longer.
Marzena Rudkiewicz, 54, a Warsaw dentist, took an extra job this month at a government hospital fitting false teeth for pensioners, saying payments on a mortgage she took out to buy an apartment for her son in 2005 have ballooned by more than half. The mortgage is denominated in Swiss francs, but she is paid in zlotys and has to exchange the weak Polish currency to pay off the debt.
"I've had to change my life because I'm stuck with this loan," she said. "It's too painful to think about."
Rudkiewicz's husband, Jakub, an industrial designer, took out a Swiss-franc loan four years ago so his small firm could buy its own office space. At the time, his monthly payment was 1,600 zlotys. Now it's 2,400, at a time when he can least afford it; business has slowed since the onset of the global financial crisis last fall.
In recent years, as their economy boomed, millions of Poles became foreign-currency speculators, buying property, cars and consumer goods with loans denominated in low-interest Swiss francs. As the Polish currency, the zloty, soared in value, most borrowers found it cheaper to pay off their debts in Swiss money, even though few had ever been to Switzerland or knew what a franc looked like.
Since August, however, the zloty has unexpectedly collapsed, losing nearly half its value against the Swiss franc. About two-thirds of all Polish mortgage holders now face skyrocketing payments. If the zloty continues to tumble, analysts fear the problem could lead to a wave of defaults in the region, dealing a major setback to Europe's already weakened banking system.
"Just like the subprime mortgages were a wonderful idea in the United States as long as house prices kept rising, so it was with the Swiss-franc loans here," said Witold M. Orlowski, a former adviser to the Polish president and now chief economist for PricewaterhouseCoopers in Warsaw. "It was seen as a win-win game. There were warnings, but basically people ignored them."
Currency gambling has backfired in several other countries in Eastern and Central Europe. In Hungary, Romania and Ukraine, a majority of mortgages and other consumer loans were taken out in Swiss francs, euros, even Japanese yen -- all of which offered substantially lower interest rates than the Eastern European currencies.
The borrowing binge rested on the assumption that the Hungarian forint, Romanian leu and Ukrainian hryvnia would keep rising in value, or at least remain stable. But since last summer, those currencies have crashed.
Moody's credit-rating agency warned last month that the region's financial system was vulnerable to defaults on foreign-currency loans and that the problem could devastate the balance sheets of Western European banks operating in the region.
German, Austrian and Italian banks dominate finance in Eastern Europe. U.S. banks are less exposed, but a few, including Citibank and General Electric's Money Bank, have a substantial market share.
In Poland, people owing money in Swiss francs have seen their monthly payments rise by 50 percent or more since last summer. Few have defaulted. But analysts predict the number of bad debts will jump if the zloty remains weak much longer.
Marzena Rudkiewicz, 54, a Warsaw dentist, took an extra job this month at a government hospital fitting false teeth for pensioners, saying payments on a mortgage she took out to buy an apartment for her son in 2005 have ballooned by more than half. The mortgage is denominated in Swiss francs, but she is paid in zlotys and has to exchange the weak Polish currency to pay off the debt.
"I've had to change my life because I'm stuck with this loan," she said. "It's too painful to think about."
Rudkiewicz's husband, Jakub, an industrial designer, took out a Swiss-franc loan four years ago so his small firm could buy its own office space. At the time, his monthly payment was 1,600 zlotys. Now it's 2,400, at a time when he can least afford it; business has slowed since the onset of the global financial crisis last fall.
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