The unexpected decision by the Swiss National Bank Thursday to stop defending the longtime benchmark of 1.20 francs to the euro has set off panic across central Europe, with Poland the most exposed of all the region’s countries to the subsequent steep rise of the Swiss currency.
“Poland stands out as the most interesting case,” says Peter Attard Montalto, an analyst with Nomura, the investment bank.
However, the reaction in the eurozone is much calmer, with analysts predicting that most of the consequences of ending the peg will be felt by Switzeralnd; the economy is expected to grow by 1.8% in 2014 and the forecast for 2015 was cut last month from 2.4% to 2.1%.
“A further appreciation against the euro could have serious implications for the economy given that Switzerland has typically sent nearly half of its exports to the euro-zone and about 10% to the US,” says Jennifer McKeown with Capital Economics. “And with the economy already experiencing nega-tive inflation for some time, the SNB will need to tread particularly carefully.”
The frank smashed through the old barrier of 1.20 to the euro, rising by 16% to parity against the common currency.
The SNB’s decision was likely triggered by the European Central Bank’s looming decision to begin quantitative easing next week, which would depress the value of the euro.
“The SNB is perhaps suggesting that they are really downbeat on the outlook for the eurozone, and the euro – they don’t want to be tied down to a sinking ship, or currency in this regard,” says Timothy Ash of Standard Bank.
The impact was altogether more acute in central Europe.
The Polish zloty slumped from an opening rate on Thursday of 3.55 to the franc, dropping to 5.19 before recovering by noon to about 4.20 to the franc. The Hungarian forint also swooned to 315 forints to the franc after opening at 266. However, Hungary is more insulated from swings in the Swiss currency thanks to a controversial government programme which is converting outstanding mortgage loans denominated in francs – at their peak more than half of all Hungarian households had such loans. The remaining foreign currency loans are in the hands of small and medium businesses, but the scale of the problem is much smaller than before the conversion programme.
“The conversion of FX mortgages sharply reduces systemic risks to CHF moves,” says Piotr Kalisz of Citi Research.
Other CEE countries have also dabbled in forex mortgages, but Romania and Croatia largely borrowed in euros, while the Baltic countries have all since joined the common currency, ending the currency mismatch.
That leaves Poland facing the largest potential problem, however analysts feel the problem is manageable. About 14.6% of all outstanding loans are denominated in Swiss francs, and the overall rate of non-performing loans is only 3%, much better than the banking sector’s overall NPL rate of 8%. That means even if the percentage of problem Swiss franc loans rises steeply, they would be unlikely to affect the stability of the broader banking system which has a very solid capital adequacy ratio of 15.3%.
“The key for us is that the size of Swiss loan stock is quite low and there has been pretty strong in-come growth,” says Mr Attard Montalto. “Household balance sheets are pretty strong as well.”
He concludes that any problems experienced by the 700,000 households holding forex mortgages may produce a “marginal drag on growth”, but that the overall impact on the economy will be limited.
Nicholas Spiro of Spiro Sovereign Strategy, a boutique advisory firm, feels that the ECB’s likely decision to begin quantitative easing could mitigate pressure against central European currencies and even see capital flows return to the region.
“This could be good news for central Europe,” he says.
However, that is unlikely to provide much relief to thousands of strapped mortgage holders, who will see their monthly payments shoot up. The largest impact could be political. Viktor Orban rose to power in Hungary in part on his populist promises of rescuing over-indebted mortgage holders. With parliamentary elections just months away, the same temptation may begin to rise in Poland.
“The key thing is the political impact,” says Mr Attard Montalto.