Many European Mortgages Spike 20% Overnight

Millions of Homeowners Caught in Euro-Swiss Franc Mess

Many European Mortgages Spike 20% Overnight
February 16, 2015

To deal with the falling value of the Euro, the Swiss National Bank (SNB) instituted a cap in 2011 holding the value of the Swiss franc at 1.2 francs per euro. The cap held until January 2015, when Swiss officials abandoned their effort – partly due to an expected further drop in the Euro caused by the upcoming stimulus program from the European Central Bank .

When the Swiss National Bank (SNB) suddenly removed the cap on the value of the Swiss franc, they caused immediate economic pain to more groups than leveraged currency traders, hedge fund managers, and stockholders in Swiss companies. Mortgage holders throughout Europe suddenly discovered that their monthly payments had skyrocketed, by more than 20% in some cases.

Why are so many mortgages affected by the action of the Swiss franc? Because of its historical stability and relatively cheap interest rates, many homebuyers throughout Europe borrowed in Swiss francs rather than their local currency.

Foreign banks issue many loans throughout Europe. Those banks typically prefer to lend in a more stable currency, preferring Swiss francs to back consumer mortgage loans. Monetary exchanges take place in the local currency, but the values of loans and payments are indexed to the Swiss franc.

In the late 1990s and 2000s, this cheaper Swiss-franc debt spread throughout Europe – especially through Central and Eastern Europe, as rates were far superior to those available through local currencies. Poland, Croatia, Austria, Hungary, and Romania are among the countries where Swiss franc debt is concentrated as much in households as it is in businesses.

Each country has dealt with currency concerns before, especially during the worldwide financial crisis in 2008, but not anything with this combination of magnitude and swiftness. Several governments are faced with difficult choices in trying to protect their people without destabilizing banking systems.

One government insulated itself from this current crisis by action that seemed extreme at the time but now appears prescient. The Hungarian government of Viktor Orban dealt with a steadily degrading debt situation by mandating that mortgage lenders throughout Hungary convert their Swiss franc loans into the Hungarian currency (the forint). The mostly foreign-owned Hungarian banks suffered massive losses as a result. Orban effectively ignored their concerns.

Croatia has decided to take a different tack, attempting to protect mortgage holders by pegging its currency (the kuna) to the value of the Swiss franc. Croatia is likely to see a significant drop in their currency reserves during this one-year program, but the Croatian government sees this as the best of bad alternatives. Romania is reportedly considering a similar move.

The Polish government is attempting to split the difference and negotiate some form of shared sacrifice with the banks and the populace – however, Prime Minister Ewa Kopacz has made it clear the sharing will not be equal. Kopacz said, “If I have to choose between the interests of the banks and the interests of the people who took out these (Swiss-franc backed) loans, I will stand behind the people, but at the cost of the banks, not of the budget.”

Clearly, governments are trying to lessen the pain for their people, and banking systems and currencies may be in for difficult times as a result. While you may not own a Swiss-franc backed mortgage, the ripple effects on the European banking system and currencies could reach some of your holdings (such as stocks you hold of companies with significant international presence or sales). Check your holdings to avoid surprises, or at least minimize them.

To deal with the falling value of the Euro, the Swiss National Bank (SNB) instituted a cap in 2011 holding the value of the Swiss franc at 1.2 francs per euro. The cap held until January 2015, when Swiss officials abandoned their effort – partly due to an expected further drop in the Euro caused by the upcoming stimulus program from the European Central Bank [LINK].

When the Swiss National Bank (SNB) suddenly removed the cap on the value of the Swiss franc, they caused immediate economic pain to more groups than leveraged currency traders, hedge fund managers, and stockholders in Swiss companies. Mortgage holders throughout Europe suddenly discovered that their monthly payments had skyrocketed, by more than 20% in some cases.

Why are so many mortgages affected by the action of the Swiss franc? Because of its historical stability and relatively cheap interest rates, many homebuyers throughout Europe borrowed in Swiss francs rather than their local currency.

Foreign banks issue many loans throughout Europe. Those banks typically prefer to lend in a more stable currency, preferring Swiss francs to back consumer mortgage loans. Monetary exchanges take place in the local currency, but the values of loans and payments are indexed to the Swiss franc.

In the late 1990s and 2000s, this cheaper Swiss-franc debt spread throughout Europe – especially through Central and Eastern Europe, as rates were far superior to those available through local currencies. Poland, Croatia, Austria, Hungary, and Romania are among the countries where Swiss franc debt is concentrated as much in households as it is in businesses.

Each country has dealt with currency concerns before, especially during the worldwide financial crisis in 2008, but not anything with this combination of magnitude and swiftness. Several governments are faced with difficult choices in trying to protect their people without destabilizing banking systems.

One government insulated itself from this current crisis by action that seemed extreme at the time but now appears prescient. The Hungarian government of Viktor Orban dealt with a steadily degrading debt situation by mandating that mortgage lenders throughout Hungary convert their Swiss franc loans into the Hungarian currency (the forint). The mostly foreign-owned Hungarian banks suffered massive losses as a result. Orban effectively ignored their concerns.

Croatia has decided to take a different tack, attempting to protect mortgage holders by pegging its currency (the kuna) to the value of the Swiss franc. Croatia is likely to see a significant drop in their currency reserves during this one-year program, but the Croatian government sees this as the best of bad alternatives. Romania is reportedly considering a similar move.

The Polish government is attempting to split the difference and negotiate some form of shared sacrifice with the banks and the populace – however, Prime Minister Ewa Kopacz has made it clear the sharing will not be equal. Kopacz said, “If I have to choose between the interests of the banks and the interests of the people who took out these (Swiss-franc backed) loans, I will stand behind the people, but at the cost of the banks, not of the budget.”

Clearly, governments are trying to lessen the pain for their people, and banking systems and currencies may be in for difficult times as a result. While you may not own a Swiss-franc backed mortgage, the ripple effects on the European banking system and currencies could reach some of your holdings (such as stocks you hold of companies with significant international presence or sales). Check your holdings to avoid surprises, or at least minimize them.

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