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Swiss stability proves bad bet for some European homeowners
[ZAGREB] Damir Hajduk likens paying off his mortgage to the tale of Sisyphus in Greek mythology, condemned forever to push a boulder uphill, only for it to roll back down again and again.
"You keep paying and the debt never goes down," said the 47-year-old Croatian father of three.
"After ten years of monthly payments, if we calculate in the (local currency) kuna, today I owe more than the principal I originally took."
Mr Hajduk is one of 60,000 borrowers in Croatia, and many hundreds of thousands across ex-Communist Central and Eastern Europe, who took out home loans denominated in Swiss francs in the early 2000s, attracted by far lower interest rates than the double-digits offered on mortgages in historically unstable local currencies.
It came back to haunt them when the global crisis that began in 2008 drove up the value of the franc as a safe-haven currency for investors.
Some respite came when the Swiss National Bank imposed a cap to rein in the currency, a policy that lasted three years until it was abruptly abandoned last week, stunning financial markets - and Hajduk.
The drama raises fresh questions over the lending practices of European banks - already dragged through the mud during the financial crisis - and the vigilance of their state regulators.
"No one cautioned or warned us about anything; they were saying the franc is a stable currency and there wouldn't be any big oscillations," said Mr Hajduk.
The value of the franc has jumped 18 per cent against the kuna since last week, and 20 per cent against Poland's zloty. Some borrowers have seen their monthly mortgage instalments increase by hundreds of euros, threatening banks with a fresh wave of defaults.
More than half a million homeowners are affected in Poland, central Europe's biggest economy, where the stock of loans denominated in Swiss francs was worth US$36 billion in November, or 8 per cent of national output.
Croatia's is equivalent to 7.5 per cent of gross domestic product. Serbia and Romania are also embroiled.
Hungary, the country that stood to lose most, escaped by the skin of its teeth, after the government of Prime Minister Viktor Orban ordered that all foreign-currency loans be converted into forints at the tail end of last year to end the ordeal of borrowers.
Hungary had been guilty of failing to regulate the banks well enough; Poland was stricter, and Serbia banned the practice of issuing loans denominated in Swiss francs in 2011. But the damage was done. "It should have been banned a long time before that," said former Serbian central bank governor Dejan Soskic.
"We were always advocating that participants in the system should not borrow in a currency which is not their source of income."
Mr Soskic said it was "illogical" to think borrowers were not aware of the risk, and Serbia's finance minister, Dusan Vujovic, this week called them "gullible".
But a former central bank official, who declined to be named because of his current post, told Reuters: "The fact is we don't know how much borrowers were warned (by banks) about the currency risk at the time they were taking loans in Swiss francs."
Poland's government, facing close-run elections this year, has ordered an investigation into the practice, to verify that the banks' activities "do not affect the legally protected interests of borrowers-consumers".
Lawsuits have already been launched on behalf of thousands of borrowers in Serbia and Croatia over interest rate hikes during the global crisis.
In 2013, a Croatian court ruled against eight commercial banks, saying they had overcharged holders of loans denominated in Swiss francs and failed to provide them with enough detail to make an informed decision. The banks dispute this.
In Croatia, No 2 lender Privredna Banka Zagreb (PBZ) - majority-owned by Italy's Intesa Sanpaolo and with 6.5 of its loan portfolio denominated in Swiss francs - said that"from the very beginning" it had pointed in loan contracts to the possibility of exchange rate movements, and had offered to convert loans into kuna at the first sign of turbulence in 2007.
Raiffeisenbank, which has some 270 million euros worth of loans indexed in Swiss francs in Croatia, said in a statement to Reuters that it had "regularly and conscientiously" informed clients of the risks.
Austria's Erste, the third biggest bank in Croatia, said it had told clients that "no one could predict the currency movements in the next 10, 15 or 20 years", had provided graphs showing past movements and "continuously" offered options to make repayments easier.
In Poland, a spokesman for BCP's Polish arm Millennium - with franc-denominated loans worth 18.8 billion zlotys in September - said its clients were "absolutely sufficiently informed about risks linked to FX loans" and were shown a simulation of how instalments may change with rate changes.
The Polish unit of Commerzbank, mBank, and Getin Noble Bank did not immediately respond to requests for comment. "It's too easy just to blame the banks; they were selling their financial product," said independent Croatian analyst Damir Novotny.
"On the other hand, the government, which is in charge of consumer protection, should have warned citizens not to take loans in Swiss francs because their earnings are not in that currency."
In Serbia, Belgrade pool hall owner Dragan Cuca, 50, took out a mortgage indexed in Swiss francs from Unicredit Bank in 2007. "I took 55,000 Swiss francs that totalled 37,000 euros at the time. Six months ago I got a statement from the bank saying my remaining debt in euros was 41,000, and after the recent franc strengthening my debt in euros would be around 47,000," he told Reuters.
Faced with the prospect of a spike in defaults, and a fight to hold onto power in elections, governments in Poland and Croatia in particular are looking at a range of measures to alleviate the burden on borrowers.
Croatia has returned the rate of the Swiss franc against the kuna to the level it was at before the Swiss National Bank abandoned its cap, and says it will also consider following Hungary's example of forcing a conversion of the loans.
Poland appears to have succeeded in pressing banks to ease interest rates on Swiss franc-denominated loans. But it may have to take bolder steps long-term, depending on the effects of Thursday's announcement by the European Central Bank of a government bond-buying programme to pump hundreds of billions in new money into the sagging euro zone economy.
Initial signs were promising, as currencies in central and eastern Europe firmed on optimism that some of the money would spill over into their own financial markets.
Some, like Poland's deputy finance minister, are resigned simply to paying more.
"I have a mortgage in Swiss francs and I was taking advantage of this while my friends were paying higher instalments as they had Polish zloty loans," Izabela Leszczyna told TOK FM private radio. "Now it's the other way around, and I pay higher instalments."