12th December 2013 by The Harried House Hunter
Back in the days before the credit crunch something called the carry trade developed. This was caused by the fact that the Japanese Yen and the Swiss Franc had much lower interest-rates than seen elsewhere. It was not long before it occured to some that one could borrow in these countries and currencies and pay a lower rate of interest than at home. Often a much lower rate of interest. This later spread from professional investors to those taking out a mortgage mostly in Eastern Europe. So the carry trade began and the effect of this was to make this borrowing seem like a Midas touch trade. The reason for this was that borrowing in a currency is the same as selling it and the size of the various carry trades was such that both the Japanese Yen and Swiss Franc were pushed lower. This meant that not only was the interest-rate cheaper but that there were apparent capital gains too. So investors might have been singing along to the group Pilot.
Ho, ho, ho
It’s magic, you know
Never believe it’s not so
It’s magic, you know
Never believe, it’s not so
What could go wrong?
The credit crunch happened and things changed. For example interest-rates fell in a lot of other places too so new carry trades slowed and ended whilst the new environment where Lehman Bros collapsed saw existing trades closed to. This was equivalent to buying the Japanese Yen and Swiss Franc and they rose. At the end of October 2007 it took 1.68 Swiss Francs to buy one Euro whereas by the end of 2010 it took only 1.50. At this point things changed as rather than rising the Swiss Franc soared such that it took only 1.25 Swiss Francs to buy one Euro. Now imagine that your debt is in Swiss Francs and you earn your money in Euros. The debt is the same in Swiss Francs but 25% higher in Euros.
Panic then set in and the Swiss Franc charged to 1.05 versus the Euro in early August 2011. There were various effects of this not least on the Swiss who were seeing their currency and indeed their economy being blown about on the winds of international finance. So they announced these measures which the Swiss National Bank has re-confirmed this morning.
The Swiss National Bank (SNB) is maintaining its minimum exchange rate of CHF 1.20 per euro. The Swiss franc is still high. The SNB stands ready to enforce the minimum exchange rate, if necessary, by buying foreign currency in unlimited quantities, and to take further measures as required.
So a little relief for both the Swiss and for those who borrowed in their currency. But those who took out Swiss Franc mortgages were left not only with a larger mortgage than before but higher monthly repayments as these too were in Swiss Francs. Quite a toxic combination to say the least.
The largest amount of Swiss Franc borrowing took place here. I do not know if bank salesmen and women were more aggressive and reckless here than elsewhere or their customers were but the numbers are extraordinary. According to the Magyar National Bank of 5.4 trillion Forints of mortgages in Hungary some 3.5 trillion Forints worth are in foreign currencies (or 1.8 million mortgages out of 3.3 million) with the majority being in Swiss Francs. Of course the rise in the Swiss Franc made a bad problem worse in terms of size.
According to the MNB the banking sector has 79,000 non-performing foreign currency loans to a value of 709 billion Forints. There are “significant numbers” elsewhere at non-banks too according to it but it does not estimate them.This is inspite of the fact that it has tried to help by cutting interest-rates from 7% at the end of 2011 to 3.2% now with the latest reduction being on the 27th of November. Also the Hungarian government has an exchange rate cap scheme which has been joined by about half the borrowers although this has an element of can kicking baout it as the problem is deferred for either five years or to mortgage maturity. Still the politicians will have moved on by then….
This has had a severe impact on bank lending to households.
Loans outstanding continued to decline in the household segment. In Q3, loans outstanding fell by around HUF 100 billion, corresponding to a 5.2 per cent annual decline.
Also whilst the MNB has cut rates take a look at what the consumer is still paying!
The APR on actual transactions fell to 9.3 per cent in the case of housing loans, and to 11.5 per cent in the case of home equity loans,
If you think that these interest-rates are high then look away now as unsecured loans cost 26%! Isn’t this supposed to be the era of zero interest-rates?
So if we treat the recorded non-performing mortgages as the tip of the iceberg we see that the issue is a a big one amongst Hungarian borrowers which makes it one for banks in Hungary which makes it one for the Hungarian economy.
For a typical Swiss Franc borrower their mortgage has risen by 50% as have the monthly repayments.
Only yesterday I discussed the economic crisis in Cyprus where pretty much everything is pointed downwards. Yes Swiss Franc mortgages were taken out here too and a familiar tale follows. Monthly repayments have gone from being based 2% over Libor to more like 4% over it and of course the capital debt has rsien in Euros too. Just to complete an incredibly toxic mix house prices have fallen by around 25% and apartments by a third over the credit crunch in what is the mortgage equivalent of a perfect storm.
In a small country like Cyprus some 3.722 billion Euros worth of Swiss Franc borrowing is quite an issue is it not?
The estimate for Croatia not far short of 100,000 people took out Swiss Franc mortgages for a total amount just short of 2 billion Euros (15 billion Kunas). There is a difference to this tale as borrowers seem to have gained some traction in the legal system there. But in the end someone will have to take the losses.
Yes here too! At the start of the credit crunch around 70% of all mortgages in Poland were in foreign currencies and this has improved but is still high at 54%. Also the Polish central bank (NBP) has pointed out this.
High Loan-to–Value ratio loans, with Swiss franc-denominated loans prevailing, have a big share in banks’ loan portfolios.At the end of 2012, the share of housing loans with LtV ratios exceeding 100% and 80% could be estimated at slightly over a 1/4 and half the portfolio respectively.
Poland has legislated to try to stop this happening again but the situation remains very risky to my mind. For all the NBP’s talk of the loans being affordable (sound familiar?) there are risks for the borrowers the (mostly foreign) banks who lent them money and for the overall Polish economy. Even it has to admit that the loans have become between 17% and 27% more expensive at a time when interest-rates are supposed to be lower. After all it has cut Poland’s reference interest-rate from 6% to 2.5%
The credit crunch has had many effects and it is fair to say that the vast majority of people have been losers from it. However some have been affected much more than others and near the top of such a list must be those who took out Swiss Franc mortgages and loans but finance it in a differenr currency. If we consider what is happening in Cyprus those there may be at the top (bottom?) of such a list.
As so often we find ourselves observing bad banking behaviour in the sale of these mortgages and loans and a complete failure of the various regulators who were asleep at the wheel yet again. I have a lot of sympathy with the individual borrowers but do not feel that they can completely escape blame as things which look too good to be true usually are. But these were also “amateurs” betrayed not only by the supposed professionals but also those who were supposed and paid to protect them.
Right now there is a hidden -how often does it get mentioned?- human cost of all this. Going forwards it remains a big risk for banks in the countries which made these loans with Austria and Italy in the van. Of course Italy currently has quite a list of economic problems. So whilst many countries will be hoping that the Swiss National Bank can hold the line at 1.20 versus the Euro.
The worrying part is that in spite of promises of “unlimited intervention” at 1.20 to the Euro it currently sits rather near to that at 1.22. If we recall that the Euro too is strong we see that it appears that there is still an appetite for Swiss Francs and that this saga may well not be finished.