Polish policy-makers appear to be pushing the prospects for euro adoption further into the future. But this still leaves the country's banks with a dilemma about how to respond to client demand for retail loans in foreign currencies. Writer Philip Alexander

How long it will take the euro currency to follow suit is the subject of some debate Few people are better placed than Marek Belka to assess Poland's prospects for joining the eurozone. Twice the country's minister of finance, the prime minister in 2004-05, the head of the European department of the International Monetary Fund from 2008 to 2010, and since June 2010 the president of the National Bank of Poland (NBP), he can see the question from both political and economic angles. He also sees the topic from the international as well as the Polish perspective.

"Eurozone entry is our strategic objective, but it is obvious that we are now further away from entering the eurozone than it looked three years ago. We still have a lot of homework to do meeting the Maastricht criteria, but also the situation in the eurozone is not clear, so we have to wait until the institutional infrastructure has been built up in the eurozone, and the crisis cases are dealt with," says Mr Belka.

Poland's budget deficit surpassed 7% of gross domestic product (GDP) in 2009, and is expected to do so again in 2010. The government has offered assurances that the debt-to-GDP ratio will not breach the constitutional limit of 55% of GDP, and Mr Belka says he has no reason to doubt that this will be achieved. However, Poland's deficit-reduction programme is scheduled to shave only about 1% of GDP off the budget deficit in 2011, pushing the Maastricht limit of a 3% deficit some distance into the future. In any case, says Mr Belka, the existing eurozone members have some crucial decisions to make as well.

"I think that the leaders of the eurozone are slowly recognising that, to flourish, the euro needs a stronger, more robust fiscal framework, and we must wait for that. This is why I consistently refuse mentioning any prospective dates [for Poland's entry]. We are very interested in the success of the euro, because if the euro is not successful, European integration is not successful, and we have banked so much on European integration in the past 20 years. So we are working hard to meet the Maastricht criteria, but we should not rush," says Mr Belka.

Marek Belka, president of the National Bank of Poland

Marek Belka, president of the National Bank of Poland

Exchange-rate risk
Poland's cautious approach to the euro has significant implications for the banking sector, because it pushes into the future any conclusion to the debate about retail lending indexed to foreign currencies, which is occurring in Poland as elsewhere in central and eastern Europe. In the boom years, lower interest rates available in euros, Swiss francs or yen tempted retail borrowers, especially when the Polish zloty seemed to be a one-way appreciation story.

As the reverberations from the fall of Lehman Brothers hit sentiment towards all risky assets, many emerging market currencies sold off. The zloty depreciated almost 50% against the euro from September 2008 to March 2009 before stabilising, and almost 60% against the Swiss franc over the same period. Given that most mortgage borrowers were earning salaries in zlotys and had not taken steps to hedge against exchange rate moves, their monthly repayments rose sharply in zloty terms.

For a variety of reasons, however, Polish foreign-currency mortgage portfolios have generally suffered less than some other lending segments - especially unsecured consumer loans in zlotys. Getin Bank had issued more than 80% of its mortgage portfolio in Swiss francs, but Artur Wiza, chief financial officer of the bank's owner, Getin Holding, says the decline in Swiss interest rates partially offset the weakness of the zloty.

"Customers would still like to have foreign-currency loans. Swiss-franc Libor [London Interbank Offered Rate] went down sharply, and sometimes customers' monthly payments are level with or even less than they paid before the crisis, even after the Swiss franc went up against the zloty. And if they compare this rate with what they would have to pay on Polish zlotys, they are still paying much less on a Swiss franc mortgage," says Mr Wiza.

Another reason for resilience in foreign-currency mortgages is that the zloty partially recovered against the euro from the second half of 2009 - although less so against the Swiss franc. The GDP growth prospects for Poland still appear to exceed those in western Europe, as the economic convergence process has not yet run its course. This means that zloty appreciation still seems likely in the medium term, says Cezary Stypulkowski, who became the chief executive officer of BRE Bank, Poland's third largest by assets, in October 2010.

"Foreign-currency mortgage borrowers are usually middle-aged people who have built a certain level of stability in terms of their income, which is also growing, and they usually understand the complexities of the product. Obviously, if the Polish currency devalued by a factor of two, this would be a problem, but what we had was some short-term volatility. This definitely impacted the repayment capacity, but if our assumption about the zloty is right, the problems will not be on a massive scale," says Mr Stypulkowski.
But Stanislaw Kluza, head of the Polish Financial Supervision Authority and a trained macroeconomist, quotes John Maynard Keynes while explaining why he is less comfortable about foreign-currency lending to households.

"In the long run, we are all dead," says Mr Kluza. "For sure, in the long run the zloty may appreciate, but the question is how volatile the road will be. This time around, the depreciation did not kill people's ability to pay, but it made families very nervous. Next time, who knows? What if the depreciation is 100% or more? At this stage, it might be a problem not just for an individual bank, but for the economy, the state and society."

For this reason, the Polish regulator had, even before the crisis, pushed banks to maintain higher underwriting standards on foreign than on local-currency mortgages. The benefits of doing so became clear during the crisis. Kredyt Bank, majority-owned by Belgium's KBC, was another active player in the Polish foreign-currency mortgage market, and Kredyt Bank CEO Maciej Bardan says these assets have performed "much better" than its local-currency portfolio.

"All the banks - to a certain extent forced by the regulator - put some extra measures in their creditworthiness assessments of borrowers while approving mortgages for retail customers. Even during the height of the crisis in the first quarter of 2009, customers kept paying their bills as far as mortgages were concerned," says Mr Bardan.

Limit or ban

However, the Polish authorities are not reassured, and are considering tougher measures to discourage or even ban foreign-currency lending to unhedged retail customers. Mr Kluza notes that high levels of foreign-currency mortgages undermine the transmission channel for zloty interest rates as the central tool of NBP monetary policy. But he also hints that he does not necessarily favour an outright ban on the product.

"Anything that could affect public stability should be managed by the state, and measures should be strongly considered. But the role of the supervisor is not to eliminate a specific market, it is rather to make sure that it is operating well," he says.

In addition, he says any restrictions on foreign-currency mortgages would need to take place very gradually, because some banks have been highly dependent on this product, and their stability could be affected by an immediate ban. However, the decision is not his alone - it will be taken by a tripartite financial-stability committee that includes Mr Belka and finance minister Jacek Rostowski.

In practice, the banks may not need much persuading. Getin Bank proved that it is possible to make a relatively rapid transition, cutting the foreign-currency component of its loan portfolio from 67% to 47% in just two years, with about 90% of new mortgages now zloty-denominated.

Getin is a locally owned bank, so funding a foreign-currency portfolio involves extra expense through hedging or issuing Eurobonds. But even banks with credit lines from foreign parents are also turning away from foreign-currency portfolios. Richard Gaskin is the acting CEO of Bank BPH, part of the GE Money group. His bank has a Swiss franc mortgage portfolio equivalent to about $5bn, which is performing relatively well, but he feels one-off tax changes have played a significant part in its resilience.

"The currency movements increased borrowers' net cost by between 20% and 35% for mortgages contracted between 2006 and 2008, respectively. In Poland this was offset by base rate reductions, but other markets such as Hungary did not benefit from this, and their foreign exchange mortgages created a much greater challenge. So the potential for similar future problems in Poland is obvious, and it makes sense to step back a little on that side. We did a lot of business in that area, and it was reasonably profitable and good quality, but we need to learn how to play in the zloty market, which is 70% of the market in this country," says Mr Gaskin.

In fact, Mr Bardan of Kredyt Bank says an outright ban on new foreign-currency retail lending might be preferable to setting a limit on the proportion of the portfolio that could be denominated in foreign currency. He believes the latter approach would force those banks with the largest foreign-currency portfolios to cede market share to those that previously had less participation in the segment, whereas a ban would create a level playing field going forward.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter