Currency-Exchange Gamble Is Costing Polish Consumers
Low-Interest Loans in Swiss Francs Turn Calamitous as Zloty Tumbles

By Craig Whitlock
Washington Post Foreign Service
Sunday, March 15, 2009

WARSAW -- Like many of its formerly communist neighbors in Eastern Europe, Poland has turned into a country of capitalist gamblers.

In recent years, as their economy boomed, millions of Poles became foreign-currency speculators, buying property, cars and consumer goods with loans denominated in low-interest Swiss francs. As the Polish currency, the zloty, soared in value, most borrowers found it cheaper to pay off their debts in Swiss money, even though few had ever been to Switzerland or knew what a franc looked like.

Since August, however, the zloty has unexpectedly collapsed, losing nearly half its value against the Swiss franc. About two-thirds of all Polish mortgage holders now face skyrocketing payments. If the zloty continues to tumble, analysts fear the problem could lead to a wave of defaults in the region, dealing a major setback to Europe's already weakened banking system.

"Just like the subprime mortgages were a wonderful idea in the United States as long as house prices kept rising, so it was with the Swiss-franc loans here," said Witold M. Orlowski, a former adviser to the Polish president and now chief economist for PricewaterhouseCoopers in Warsaw. "It was seen as a win-win game. There were warnings, but basically people ignored them."

Currency gambling has backfired in several other countries in Eastern and Central Europe. In Hungary, Romania and Ukraine, a majority of mortgages and other consumer loans were taken out in Swiss francs, euros, even Japanese yen -- all of which offered substantially lower interest rates than the Eastern European currencies.

The borrowing binge rested on the assumption that the Hungarian forint, Romanian leu and Ukrainian hryvnia would keep rising in value, or at least remain stable. But since last summer, those currencies have crashed.

Moody's credit-rating agency warned last month that the region's financial system was vulnerable to defaults on foreign-currency loans and that the problem could devastate the balance sheets of Western European banks operating in the region.

German, Austrian and Italian banks dominate finance in Eastern Europe. U.S. banks are less exposed, but a few, including Citibank and General Electric's Money Bank, have a substantial market share.

In Poland, people owing money in Swiss francs have seen their monthly payments rise by 50 percent or more since last summer. Few have defaulted. But analysts predict the number of bad debts will jump if the zloty remains weak much longer.

Marzena Rudkiewicz, 54, a Warsaw dentist, took an extra job this month at a government hospital fitting false teeth for pensioners, saying payments on a mortgage she took out to buy an apartment for her son in 2005 have ballooned by more than half. The mortgage is denominated in Swiss francs, but she is paid in zlotys and has to exchange the weak Polish currency to pay off the debt.

"I've had to change my life because I'm stuck with this loan," she said. "It's too painful to think about."

Rudkiewicz's husband, Jakub, an industrial designer, took out a Swiss-franc loan four years ago so his small firm could buy its own office space. At the time, his monthly payment was 1,600 zlotys. Now it's 2,400, at a time when he can least afford it; business has slowed since the onset of the global financial crisis last fall.

Looming Troubles

Compared with the economies of some of its neighbors, Poland's is in good shape. Growth tailed off late last year, but analysts have not forecast a recession for 2009. Public finances are stable, and many banks are still reporting profits.

Government officials said they worry Poland is being unfairly lumped together with the region's economic basket cases, such as Latvia, Ukraine and Hungary. All three countries have required bailouts by the International Monetary Fund.

"You try to differentiate yourself and explain what problems exist in your own country and which problems do not," said Dominik Radziwill, a deputy finance minister. "Just because we only recently joined the European Union doesn't mean we have a bigger potential to default."

But the Polish economy is facing trouble on several other fronts.

After the country joined the bloc in 2004, it had a chance to move quickly to replace the zloty with the euro. But as the zloty appreciated, lawmakers put off adopting the new currency.

Today, Polish officials are kicking themselves. Two countries in the region that did adopt the euro -- Slovakia and Slovenia -- have been sheltered from the financial woes affecting the region.

After Poland was admitted to the European Union, more than 1 million Poles moved abroad to seek work, particularly in Britain, Ireland and Sweden. Now that economies in those countries are swooning, many of the expatriates are returning home -- just as the jobless rate in Poland is rising for the first time in years.

Leszek Czarnecki, a billionaire developer and banker who became Poland's wealthiest investor during its go-go years, said nobody knows how things will turn out.

In an interview, Czarnecki called Poland's economy "fundamentally sound" but warned that the government's biggest challenge will be to stabilize the zloty. If it does, he said, the economy could grow by 2.5 percent this year -- a major accomplishment in the face of a global recession.

But if the zloty continues to plummet, he said, the economy could contract by as much as 5 to 7 percent. "It might be totally crushed, an unbelievable crisis," he said.

Czarnecki is the chief investor in Getin Holding, a banking company that specialized in Swiss franc loans. He said that his banks have not experienced a rise in defaults and that Getin remains highly profitable. But he acknowledged that, in hindsight, the foreign-currency strategy was "a mistake."

Czarnecki blamed the problem largely on credit-rating agencies and foreign banks, which he said treated the loans as low risk and encouraged them for years. Now, he said, those same institutions are telling investors to pull their money out of Eastern Europe.

"We believed that well-dressed, perfectly well-spoken bankers -- some people call them 'bangsters' -- from Wall Street and London City really knew what they were talking about," he said.

Dashed Dreams

The foreign-currency crunch has shaken other pillars of the Polish economy. Mortgage lending has dried up, depressing the real-estate market. One-third of construction jobs have been lost since last year.

Grandiose dreams have been dashed. Two years ago, Czarnecki unveiled plans to build Sky Tower, an 846-foot-tall skyscraper in Wroclaw, Poland's fourth-biggest city. The building would have been the country's tallest, but he has had to shrink it by 20 percent and postpone construction.

The story is similar in downtown Warsaw. Until last fall, the capital was jammed with construction cranes. Today, all but a handful of projects have been canceled or put on hold.

One of the few buildings still under construction is a 56-story luxury apartment tower on Gold Street, in the city center. Designed by the renowned U.S. architect Daniel Libeskind, it was intended to cater to Warsaw's newly rich, with many residences priced at more than $1 million.

But the developer, Orco Property Group, has been able to sell only about 40 percent of the units. "It's definitely slowed down," said Alicja Kosciesza, the marketing director.

As in the United States, angry Poles are blaming the banks for excessive lending. Until banks tightened credit last fall, no-money-down loans valued at 120 percent of collateral were common. Borrowers could sign up for mortgages lasting 75 years.

"Banks started this huge competition for customers, lowering all the conditions and requirements to make loans more accessible," said Aleksandra Natalli-Swiat, an opposition lawmaker.

In 2006, the Polish Financial Supervision Authority recommended that banks limit the size of Swiss-franc loans to 80 percent of the maximum it would otherwise lend a customer.

The recommendation was not binding, but most banks observed it, said Andrzej Stopczynski, the authority's managing director for banking supervision. If regulators had not intervened, he added, today's problems would be far worse.

Most banks stopped offering foreign-currency loans last fall after the zloty began to plunge. But about 60 to 70 percent of existing mortgages in Poland are still denominated in Swiss francs, Stopczynski said.

Despite the fall in the zloty, many Poles remain convinced that speculating in Swiss francs can be a good deal.

Rafal Lyczek, a 31-year-old economist from Poznan, converted his mortgage from zlotys to Swiss francs last May, in a terrible bit of timing. His payments have almost doubled since then. "I didn't think the zloty could weaken so quickly," he said.

Lyczek has started a Web site, dubbed "Buy a Franc" in Polish, designed to help people trade in the foreign-exchange market themselves instead of paying high commissions to banks.

But he said he has no regrets about borrowing in Swiss francs in the first place. He thinks the zloty is undervalued and will make a comeback.

"If I gave in now, it means I'd be giving my money back to the speculators and that I will have lost," he said.

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