The rise of the Swiss Franc has implications for Austria,Bulgaria, Hungary, Lithuania,Poland and Romania

One of the themes of this blog has been that politicians often engage in hyperbole and nearly as often in outright misrepresentation. Indeed I often quote from the apocryphal civil servant Sir Humphrey Appleby from the series Yes Minister who observed.

Never believe anything until it has been officially denied.

I am reminded again of Sir Humphrey’s words this morning and let me explain why. Back at the end of March you could see this on the website of the central bank of Belarus (a Russian republic which includes the city of Minsk).

The National Bank completely rules out the possibility of a significant one-time adjustment in the exchange rate of the Belarussian ruble.

You are probably now wondering how much rather than if aren’t you? The Belarus rubles official exchange rate has been devalued by 56% from 3155 to the US dollar to 4930! Even better the statement I have shown above is still on their website so they are denying the possibility of a significant devaluation even after they have done it!

A Consequence of this

As there are issues here which could be passed onto places like Greece or Ireland where a return to previous currencies such as the drachma and punt is being debated more and more let me give some illustrations. Firstly for foreign purchases the official rate leaves them 36% poorer. However those who had invested abroad may well have been protected for example at the end of last week the official price of gold was 152,432 rubles per gram and it is now 239,102. In ordinary trading there have been heavy falls in the price of silver recently as it has reversed course from near to US $50 per ounce to US $35, but measured in Belarus rubles it has now hit a new high of 5516 per gram as the currency fall has outweighed the price drop!

So there is some food for thought for you. I shall be returning to the impact of currencies on commodity and oil prices going forwards as it seems possible that price falls could be accompanied by a rise in the US dollar. But for now here is a conundrum for those in Greece,Ireland and Portugal which is that the more the likelihood of a devaluation rises the more it is in their interest to move funds abroad which of course makes a devaluation more likely although they do have the advantage of being able to move funds in the same currency as they could move to overseas bank accounts in Euros.

The rise and rise of the Swiss Franc

Yesterday the Swiss France hit (yet another) new high against the Euro. This subject had gone quiet for a while but as ever it has returned to haunt not only Switzerland and her central bank but all those who borrowed in Swiss Francs in the “carry trade” period. I wrote on this subject back on the tenth of June last year and let us first look at the situation for Switzerland herself.

In the recent melee which has surrounded the Euro and its recent falls against other currencies there has been a nation indirectly affected quite badly and it is Switzerland. It is a side-effect of the euro zone crisis but is also becoming something of an economics test case. As money flees the euro zone and the Euro it looks for somewhere to go and Switzerland has a reputation not only for economic stability but stability all round and so money has gone into the Swiss Franc. The problem with this is that Switzerland is only a small country and there is a limit to this implied in her size.

Economics textbooks often have as an example a small open economy and this applies to Switzerland here. If we move on from last year to now we can see that the rise in the price of precious metals particularly gold is one of the reasons why the Swiss Franc has been driven higher. As we stand now it is a lot higher as again from the article.

However the flood of money that entered Switzerland in the earlier part of 2010 caused the exchange rate between the Euro and the Swiss Franc to drop from 1.51 in mid-December to 1.4325 at the end of April.

As you can see the Swiss Franc exchange rate is much stronger against the Euro now that it was then. The new high is at 1.2322 versus the Euro. This may be bad enough in its implications for the Swiss economy but there is something worse as the Swiss National Bank did this in response.

In April she intervened on a scale estimated at 1 billion Euros a day and in May she intervened on an enormous scale as her foreign exchange reserves rose from 151 billion Swiss Francs to 232 billion which is an increase of just over 50% in one month according to the provisional figures she has released.

So not only has the Swiss economy been punished – a report at that time suggested and exchange rate of 1.25 to the Euro would create deflation, so if this rate is sustained there are serious dangers- but her central bank has amassed very large losses in a failed attempt to halt the surge of the Swiss Franc. Whilst I had sympathy for its problems I did not have much respect for the SNB’s intelligence.

I have often thought that currency intervention against  long or even medium term pressure on a currency is likely to be pointless and it is the Swiss National Bank’s misfortune  to have pretty much established a test case proving my point.

The SNB has lost around 26 billion Swiss Francs or just over 20 billion Euros from this and not even the rally in gold prices which made it 6 billion Swiss Francs on its holdings was able to put much of a dent in this. I will leave you with the implication of this and possible deflation for Switzerland and move onto another consequence.

Eastern Europe borrowed heavily in the Swiss Franc

Again back on the tenth of June last year I observed this.

Moving outside of Switzerland a lot of property and construction borrowing in Eastern Europe was denominated in Swiss Francs. It is not a good situation for these borrowers to see the flip side of the Swiss Franc appreciation ie. their debt has risen in their own currency. Quite what the regulators were doing in these countries to allow mortgages etc. to be denominated in this way escapes me… However it is not a surprise to me that we have seen signs of economic distress recently in Bulgaria and Hungary for this reason.

Just to give you a flavour of some of the numbers involved here and concentrating on Hungary where this was and is a particularly big factor some 1.7 million mortgages were taken out in Swiss Francs and the total sum borrowed is estimated at around half of her Gross Domestic Product or GDP. This issue is such a big one for the Hungarian economy that since 2010 there has been a moratorium on repossession and evictions as the Hungarian government decided that its economy could not take the scale of what might happen if it did not do this. This has led to the inevitable moral hazard result that many who can pay have chosen not to so the underlying effect is to stop the housing market operating in any sort of an efficient manner. It looks as though for its next move the Hungarian government will cover exchange rate losses until 2015 when it will hand them back to the homeowners in an almost textbook definition of “kicking the can down the road”.

I have some sympathy with Hungarians who find themselves in such a position as the misselling scandals that have taken place in the UK have shown how salesmen and women operate with a juicy commission cheque in their eyes but much less for the country and its regulators which let this happen on their watch. However the problem is geographically wider as others borrowed in Eastern Europe.

If we move to look at the other countries affected we see this. In Lithuania, Croatia,  and Romania, loans denominated in foreign currencies account for between three fifths and three quarters of the total, with the figure for Bulgaria also being close to 60%. Poland has a lower overall percentage in terms of loans but Unicredit has estimated that some two-thirds of all mortgage borrowing was in Euros and Swiss Francs and there is another problem too.

Who loaned the money?

If we think of the other side of the balance sheet we think of the banks who made these loans. We can see quite quickly that their chance of full repayment is in line with the joke “slim to none and slims out of town”. So not only have the economies of Eastern Europe been adversely affected but so have the banks which lent the money.

My understanding is that they were mainly based in  Germany,Austria ,Italy and the Nordic countries. As an example of the problems created for banks in the Euro zone the European Central Bank had to open a lending facility in Swiss Francs for a while when the credit crunch hit. We also got a clue as to who was most affected as Austrian banks were responsible for 28% of the borrowings made which is quite a lot for a small country! Of course Austrian banks were also lending to mortgage borrowers in Swiss Francs on a substantial scale so Austria will be being hit on both sides of the balance sheet. Makes you think about Austria’s future stability does it not?

Still we have learnt something for the future surely?

Back in February Bloomberg news reported this.

Carry trades funded in the yen and Swiss franc are becoming profitable as borrowing costs rise in Europe and Canada, according to UBS AG.

As central banks resume boosting interest rates, investors should start thinking about borrowing in the Japanese and Swiss currencies to buy the Swedish krona, the Norwegian krone, the euro and the Canadian dollar.

Now this is not the same as an outright recommendation to take out foreign currency mortgages again but it is only a short step. It is a particularly short step for a banking industry that has not been reformed at all as what I have described above about Hungary has been yet another banking bailout dressed up as help for distressed homeowners. They will be helped until the banks have recovered!

The Carry Trade Explained

I have written on this subject quite a few times before with articles on the 31st of August last year and the 28th of February this for those looking for more information. For those looking for why this happened but do not want the full explanation the short version is that the borrowing was cheaper usually much cheaper. So banks could offer cheaper mortgages to borrowers whilst awarding fat commissions to themselves which no doubt led to the awarding of even fatter bonuses….

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  • Jon Richards


    Great blog, but I think the Belarus deval is more like 56% than 36%/


  • Ian_jones

    Excellent blog, opens eyes to how this is all unfolding. Can only imagine most Greeks, Irish and Portuguese must have opened German bank accounts and moved out their savings. They cannot lose but can win big time!!! the outflows must be massive!!!

  • Anonymous

    Hi Jon
    Welcome to my blog and thank you for the compliment.
    Ooops you are entirely right,apologies. Corrected now.

  • James

    Great blog, although depressing!!

    When I think about the mis-selling scandals in the UK  and read this article, the pattern is very familiar.

    1. People start with something simple, say a repayment mortgage;
    2. Something more complicated, such as an endowment mortgage (but with higher commissions) comes along;
    3. These get sold to people who don’t understand them;
    4. The politicians finally wake up, an investigation is launched, the mis-selling is stopped ten years too late;
    5. By this time, lots of people have lost lots of money, but all of the salesmen responsible have long since departed;
    6. The charade is repeated with pensions, foreign currency mortgages, 125% mortgages, product liability insurance etc etc.

    The only modern twist seems to be that the sums are so gigantic that even states cannot cope.

  • Anonymous

    Super blog, Shaun and very timely and apposite. Here in Croatia, many households were “seduced” into Swiss Franc mortgages and are now “reaping the whirlwind”. As average monthly salaries work out at €750 (with many, many people earning a lot less), we can see the malodorous effects seeping through the system! 

  • Jonathan Wheeler

    Keep up the good work.
    Your blog is my homepage.

  • Streak

    A day late I know, but can I refer you to todays Spiegel on line business section? The item on the ECB you may find interesting. 

  • Anonymous

    Thanks you streak I will take a look…

  • Anonymous

    Hi Ray
    It is so common in Eastern Europe and parts of the Balkans. In some respects it is like a cancer eating away at the financial system. Are there figures published as to the scale of the problem in Croatia?

  • Anonymous

    We built our Bulgarian property business on cash sales. Raiffeisen bank (Austrian) offered Bulgarian mortgages to British
    residents only if they could prove income and creditworthiness in the
    UK. I had poor experiences with home loan brokers offering liars loans and we do not have any mortgages secured on property we built. In Bulgaria property and mortgages are mostly sold in Euro. The Bulgarian currency was pegged to the DMark in 1997 with IMF help after the ex (?) communists caused hyperinflation. It remains pegged to the euro at 1.95 Unless the currency peg breaks, euro mortgages will not get more expensive in local currency terms.

    Bulgarian property has lost value following the credit crunch, however there are wide regional variations. Sunny Beach and Bansko are some of the biggest losers and may cause banks large losses.

  • Anonymous

    Indeed Shaun. My investigations have uncovered an interesting theme to this aspect. Whilst the finance industry is “coy” about actual figures, there exists a type of mortgage called a “Swiss Franc Clausal” mortgage. An individual agrees to take such a loan in Swiss Francs BUT monthly payments are made in local currency (Croatian Kuna), so, in effect there are no “Swiss Franc” loans. However, the problem goes deeper; looking back over the past 4 years, the Swiss Franc has risen from Kuna 4.5 to the current level of Kuna 6 per Franc. Thus, anyone who agreed to this 4 years ago is now paying 33% more but the mortgage remains  the same! I should also add that over 90% of all personal lending is now denominated in Euro with loans at 5.5% – 6.25% and that there is a possibility for any outstanding Swiss Franc loans to be repaid and “repackaged” in Euro. I hope this is interesting and if you or any readers would like to know more, please do not hesitate to contact me.
    Once again Shaun, the site and content are beyond compare!
    Ray Fletcher

  • Sovjohn


    Just a quick remark – I will give a heads up re: Greece when our chaotic situation is next discussed in an article :)

    For now, I’d like to point out to Shaun and MM that ever since you changed your format to include summaries on your “frontpage” and the full article is available after you click on it, the mobile browsing issue I had reported, disappeared! This should cause it, I think.

    We’ll be in touch soon.


  • Anonymous

    Good Ioannis
    We are trying to make improvements and like anything it is a bit here and a bit there…

    As to Greece there is so much going on everywhere that sometimes it has to take its turn! I am making much more of an effort to update my twitter feed these days when I have time as it does allow for quick updates.

  • Mcgrathr20

    Hello Ian, I really do not understand how an Irish person will gain by moving his Euros from Dublin at 3 % into a Berlin bank at 1% .  Could you explain?

  • MikeB

    Interesting blog. Thank you. What of the plight of many Brits who bought property in Cyprus using CHF loans. They now face ruin – are there any signs the banks might offer some flexibility to help rather than trigger defaults and re-possessions. What would Greek ejection from the Euro mean for Cyprus. I’m guessing you might like chess in 3D? 

  • Anonymous

    Hi Mike

    Welcome to my blog and thank you for the compliment.
    As to the CHF loans I was aware that they existed in countries that I did not mention in this article but did not have hard data on the exact numbers etc.. I would be interested in seeing any numbers you have on the problem in Cyprus.

    As to Cyprus a Greek ejection from the Euro might have issues for the Greek half of the island but as they joined the Euro much later than Greece and dont seem to be in the same economic mess they might stay in it. That is of course dependent on two main factors. The first being that there is a Euro to stay in and the second being that they do not decide that a currency devaluation might help them. It would be logical for them to observe the Greek experience should it leave and learn from it what they can…

    Chess in 3D  sounds fascinating but I am afraid I have only seen it in sci-fi films like Star Trek! Does it actually exist?

  • MM

    Very clear reasoning. Congratulations!

    Is it possible to derive from facts and figures that national or central banks of Central and East European countries, along with their respective governments, particularly their ministries of finance, are primarily responsible for excessive indebtness and unbearable situation of their citizens who took housing loans in swiss francs prior to global financial crisis in August 2008?

    Shouldn’t they accept that responsibility and give them one-time financial help to the amount of exchange rate hike of their loan principles and allow for loan conversion into local currency with adjusted interest rate as if lenders’ carry tree never happend?

    A Croat from Zagreb

  • MM


    Now (13th July 2011) Swiss franc exchange rate is already 6,44 Croatian Kuna, meaning over 40% raise in monthly payments then it were in 2007 or 2008 when home loans were originally taken!?

    For instance, for a loan of €100000 and 5% interest rate, with 20 years repayment period in Swiss francs in 2007, one should monthly pay now €934, instead of €660 as it was at the beginning, and now after 4 years,  the principal is amounting €120000. Incredibly.

    Certain financial “analitics” in Croatia recently commented the situation that home owners were greedy and were actually betting and lost!?

    Could anyone comment on this?


  • Anonymous

    I am not sure I agree with the epithet “greedy”. However, this is a double-edged sword in that  homeowners  saw an opportunity (at the time) to reduce their immediate payments; banks encouraged this in the setting of low(er) rates when compared with other currencies or even local currency mortgages. Now, the tide has turned and many people are having to bite the bullet. A colleague in my office spoke to me this morning on this topic and said that even though his monthly payments had increased, he felt the best option (for his circumstances) was to hold tight and wait as to change currencies would incur considerable fees. Does this help? 

  • kostas gre(at)ek

    Hi SHAUN.Its a (worried,ansafe greek man) talking to u.Compliments to your block.
    Great job!!
    My question is “is it good timing to give my eyro and buy swiss franc or you think i should wait?….. or buy another some other’s country money?

  • Anonymous

    Hi Kostas

    Welcome to my blog and thank you for the compliment.

    I am not really in the game of direct investment advice but this is a situation that we used to call “catching a falling piano”. What I mean by that is standing in the way of this Swiss Franc rally has just flattened everyone who has traded against it for some time. We are just under 1.16 but when I wrote this article we were at 1.23 and a year ago the rate was 1.35 or so. I could go further back but the result is the same.

    So the danger in buying the Swiss Franc now is that you are doing so after a long and sustained rally for it and the danger is of a reversal. In my opinion whilst the Euro zone continues to muddle around incompetently then the Swiss Franc may rally some more. However if they show any signs of getting a grip then one could expect a rally for the Euro and the Euro could have quite a bounceback.

    Of course we are in this situation partly because so far the Eurozone’s officials and politicians have shown no sign of getting a grip.

    Another factor to consider is that this Swiss Franc rally must be hurting the Swiss economy. I remember reading a report that its economy would be badly hit if it went through the 1.29 level which of course it has surged through. So if it can think of anything Switzerland would presumable be willing to give it a go, anything except currency intervention that is as the Swiss National Bank has lost a lot of money as we stand trying to do this.

    So no direct advice but some thoughts for you to consider

    As to Greece,good luck, the Euro zone is doing you no favours at all…

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  • Buzz

    Hi Shaun, I wanted to bring to your attention that people in many countries, mostly, Greece and Bulgaria, brought to court the loan bank contracts and seems CHF bank loans are pure cheat! Banks did know that CHF is going to rise but not the people. Banks even did not have CHF in their vault and in 99% of the loans gave to people other currency. Infact the CHF is only in the bank papers. What I mean is that this bank product in reality is nothing but a huge fraud and not a problem of the bank system but of the local law and politics. As soon as people recognize this fact and rise their voices the problem would be fixed!

  • Santosh seo

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