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Poland’s mortgage holiday for households threatens bank profits

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With inflation soaring and recession looming in Poland, suspending mortgage payments will provide much-needed respite for Jakub Luzanek and his wife.

The couple have seen their monthly mortgage bills surge by more than 70% since the beginning of the year as the country’s central bank raised interest rates to combat skyrocketing prices.

“Our mortgage suddenly became terrifying,” said Rdzanek, who bought a Warsaw apartment last August.

The Luzanek family wasn’t the only one to breathe a sigh of relief after the Polish government declared a state of emergency. Mortgage repayment deferment last Friday.

The move will allow borrowers to suspend payments for eight months between this year and next year. But while the Polish government is allowing mortgage holders a credit holiday, banks warn it will wipe out their profits.

Lenders also claim they are giving borrowers mortgage leave to increase the chances of a right-wing government winning next year’s national elections. Polandeconomy has survived the double blow of soaring inflation and the war in Ukraine.

Eastern Europe is not alone in trying to ease the pain. As the cost of living crisis casts a shadow over the global economy, governments around the world face the challenge of curbing high inflation by raising interest rates.

Banks are targeted by other governments. Hungary recently €2 billion windfall tax Spain said it would impose a tax of 1.5 billion euros a year on banks. Romania is also looking to ease mortgage payments for households most affected by inflation.

“The idea is clearly starting to spread to other areas, and we need to keep an eye on it,” said Simon Nellis, managing director of European banking research at Citigroup. “This is clearly a concern for bank shareholders.”

Unlike the Romanian proposal, Polish policy is not a test of the means. Some Polish regulators had asked the government to limit the scope of the moratorium. “There are rich people who don’t need this exemption,” Adam Grapinski, president of the Polish National Bank, said at a press conference last month.

Grapinski also questioned whether the law is moving “in a different direction” from the central bank’s efforts to tighten monetary policy. In July, the benchmark rate was raised to 6.5% for the sixth straight month.

Some bankers even suggest that the government has launched a crusade against them. Jaroslaw Kaczynski, leader of the main political party Law and Justice, recently proposed a windfall tax for banks that did not pay enough interest on their deposits.

The Polish bank was set to report strong earnings, but estimates it would cost around Zloty 20 billion ($4 billion) in total if all eligible mortgage holders skipped monthly payments. . The moratorium applies only to mortgages contracted in Zloty.

Poland’s two largest banks, PKO and Pekao, which account for 40% of the country’s mortgage market, will be hit hardest by the changes. But foreign lenders Santander, ING, Commerzbank and the Polish arm of BNP Paribas will also suffer.

Commerzbank expects 60-80% of mortgage holders at its Polish subsidiary mBank to take credit holidays. The bank is considering a lawsuit against the Polish government. Commerzbank Chief Financial Officer Bettina Orlopp said:

Citi’s Nellis hopes some banks will take the matter to court, despite a poor record of trying to force the government to change its mortgage policy. “The government is involved and retroactively changing the contract, which looks a bit naughty,” he added.

The Polish housing market is highly exposed to interest rate fluctuations as the overwhelming majority of Polish mortgages have variable rate rather than fixed rate. Variable mortgages account for more than 70% of new loans in Romania, and the government in Bucharest has proposed exemption from mortgages.

Some economists warn that Poland’s credit suspension could backfire as monetary tightening already threatens to push the economy into a technological recession in the coming quarters.

“Banks could become more selective when it comes to providing loans,” said Marcin Kuzyowski, a senior economist at BNP Paribas’ Polish subsidiary. The moratorium warned that “it could lead to a tightening of credit policy and entrenched inflation, which could require more rate hikes than otherwise.”

In another move, the government is calling for new interbank lending rates in January as well.

But the bank has warned against rushing to reform the Warsaw interbank offer rate. This is similar to what was done to get rid of the scandal-tainted LIBOR rate, which took years to come into force. BNP Paribas is one of the banks to warn that changing interest rates in Poland could lead to international lawsuits.

“This is a major reform and means repricing all portfolios and all hedging instruments,” said Przemysław Paplotny, head of PwC’s financial services division in Poland. “You have to remember that Polish banks are hedging interest rate and foreign exchange risks, which they contract with international parties.”

Despite the turmoil in the banking sector, Paplotny said the balance sheets of Polish banks were strong enough to withstand the moratorium. “We cannot foresee any dramatic circumstances that would necessitate discussion of an immediate capital injection,” he said.

The Polish banking market has been embroiled in a decade-long legal battle over who should pay for Polish homebuyers who opted for Swiss franc mortgages in the early 2000s, when interest rates in Switzerland were much lower than in Poland. still entangled. After the 2008 financial crisis, the cost of these mortgages surged as the Swiss franc appreciated against the zloty.

Agnieszka Accordi, audit partner at PwC, said it makes sense in the Swiss mortgage context to consider how borrowers take out mortgages. Poland should try to “end the debate about whether customers understand what they are paying for,” she said.

When Rdzanek and his wife bought their Warsaw flat last summer, their real estate agent advised them to use a variable rate mortgage. “It’s definitely a decision I regret,” Ruzanek said. Administrative fees charged by his bank have also risen sharply in recent months.

Even at a time of intense political polarization in Poland, the moratorium was overwhelmingly approved in parliament, backed by left-wing opposition parties who wanted to share the credit for helping consumers, not banks.

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