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By Patricia Kowsmann
The European Union's top court on Thursday ruled in favor of Polish consumers who took out low-rate mortgages tied to the Swiss franc years ago, only to see the currency and their repayments soar, potentially leaving banks on the hook for billions of dollars.
Drawn by the promise of interest rates far lower than those offered in Poland's own currency, the zloty, more than half a million Poles took out mortgages tied to the Swiss franc, in particular between 2006 and 2008. What seemed a great deal turned sour after the Swiss franc, a safe-haven currency, surged after the financial crisis in 2008 and again in 2015, when the Swiss central bank abandoned its commitment to cap the value of the franc.
Unable to make their mortgage payments, many borrowers took the case to Poland's courts, alleging unfair terms in their contracts. Courts have been mostly siding with the borrowers in case decisions this year, but have been unable to agree on what actually happens to the contract. The European Court of Justice said in its ruling that contracts would have to be annulled, paving the way for borrowers to pay the remaining of their debt in zloty, at the original exchange rate, rather than in Swiss francs.
Chiara Romano, senior analyst at Scope Ratings, said the decision to annul, rather than change the contracts, could also "raise questions on whether banks, for instance, would be forced to pay back borrowers for payments done so far."
According to Ms. Romano, there are 100 billion zloty ($25.2 billion) in outstanding housing loans denominated in Swiss francs, worth 5% of banking assets as of July. A forced conversion from Swiss francs to zloty at 2008 exchange rates could reach 44 billion zloty, or 3.4 times the annual profit of Polish banks, they add.
Germany's Commerzbank AG (CBK.XE), Spain's Banco Santander SA (SAN.MC) and Portugal's Banco Comercial Portugues SA (BCP.LB) all have operations in Poland that sold Swiss-franc tied mortgages. Shares of mBank SA (MBK.WA), Commerzbank's subsidiary in Poland, were up 2.3%. Santander Bank Polska SA (SPL.WA) shares were down 2.8% and shares in the Polish subsidiary of BCP were up 1.7%. The ruling's longer-term impact on banks will depend on whether more mortgage holders will sue and the outcome of those cases. Some Polish lenders also sold these types of mortgages and could also potentially face lawsuits.
Poland's banking regulator said Thursday that its banks are well capitalized and secure, adding lenders with a large share of foreign currency loans were required to hold enough capital to handle any troubles.
Economists at ING expect banks will eventually begin proposing ways to settle the case with the borrowers to avoid expensive legal costs. The debt then will likely be converted into zloty at the original exchange rate when the mortgage was taken.
Most of the Polish borrowers who have loans in Swiss francs took them in 2006-2008 when the zloty was closer to 2.5 or even below 2 to the franc, compared with current levels close to 4.
Write to Patricia Kowsmann at email@example.com
(END) Dow Jones Newswires
October 03, 2019 09:25 ET (13:25 GMT)
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