Mortgage loans: Don’t cry for Swiss franc lenders

It would take a heart of stone, said Oscar Wilde, to read of the death of Charles Dickens’ fictional orphan Little Nell without laughing.

The plaintive laments of emerging Europe’s bankers at the prospect of further hefty penalties for doling out Swiss franc loans hand over-fist-in the run-up to the financial crisis also fail to elicit much sympathy.

This is not because their complaints are unjustified. The proposal of Poland’s opposition Law and Justice Party, currently leading the polls ahead of parliamentary elections on October 25, to force lenders to foot the bill for converting a substantial part of the Z144 billion ($38.2 billion) of Swiss franc mortgages outstanding in the country into zloty is populist and disproportionate. 

Less resilient

Unlike in Hungary, where such loans were distributed to households with low credit ratings and limited financial sophistication, in Poland the product was sold mainly to affluent customers. 

Croatian borrowers of Swiss francs have proved less resilient. The idea, however, that the country’s banks are riding high as a result – as the political sponsors of a bill to force the conversion of all loans in the currency into euros, which was passed by parliament in September, claim – is clearly absurd.

Bankers may also be correct in arguing, as many in Poland and Croatia are doing, that forced conversions of Swiss franc loan portfolios are unconstitutional and – for foreign lenders – in contravention of international investment treaties. 

The fact remains, however, that CEE banks’ current Swiss franc woes are largely of their own making. Leaving aside the question of whether a complex financial product should have been sold to citizens of transition countries in the first place, it has been clear since 2008 that the issue would resurface at times of exchange rate volatility. Since 2010, when Fidesz took power in Hungary, it has also been apparent that it makes a very handy political football. 

Yet at no point in the seven years since the financial crisis have regional lenders made any serious attempt to come up with sensible, industry-wide solutions to the problem. Reluctant to take losses or admit liability, they have ignored genuine public concern around Swiss franc mortgages and instead allowed populist policymakers to drive the debate.