Poland's $32 Billion Mortgage Fiasco Gets Its Day in EU Court
Warsaw lawyer has spent years assembling a landmark case. Banking shares are under pressure as EU court is set to rule.
A non-binding opinion by an adviser to the European Court of Justice in May said Polish courts can’t maintain abusive terms in foreign-currency loan agreements. That view has dramatically shifted the risk perception. The Polish Banking Association estimates the cost of a negative ruling at 60 billion zloty ($16 billion), or about four years of the industry’s profits. Banking stocks have come under pressure in recent weeks, as investors fret over the outcome of a final ruling expected from the Luxembourg-based court as soon as next month.
Wrong Bet
At the heart of the issue is a clever bit of financial engineering that many Polish home buyers enjoyed before the 2008 financial crisis. Assuming that the zloty would indefinitely maintain its value-increasing run, mortgage holders took out foreign-currency denominated loans, with the Swiss franc proving particularly popular.
But when markets turned in the wake of the global banking meltdown, the equation no longer worked as the zloty began its long descent. To date, the currency lost about half of its value against its Swiss counterpart over the past 11 years. Poland now faces the burden of $32 billion in non-zloty loans that have left many homeowners struggling to reduce their debt or have pushed them underwater with mortgages exceeding their property values.
So far, about 8,000 lawsuits have been lodged in Polish courts by foreign-currency mortgage holders, with creditors winning about 90% of the 70 rulings handed down this year.
Falling Shares
Investors are starting to listen, with an index of Polish banks dropping 7% in the past two weeks on concern the industry will need to take massive provisions if the EU tribunal rules against lenders. Banks with the biggest foreign-loan portfolios, including Bank Millennium SA, Getin Noble Bank SA and MBank SA, have lost about a fifth of their value in the past month.
The concern for banks and their investors is that a favorable ruling on potentially abusive clauses in loan agreements could trigger a litany of lawsuits from the roughly 600,000 Polish families holding such loans. The counter-argument goes that even with such a verdict, it will take years for any change to take hold as cases wind their way through the legal system.
More to Come
Either way, Czabanski says the litigation to date is merely the tip of the iceberg. Having spent years neglecting the issue, and with politicians shifting awkwardly between protecting the biggest lenders on the one hand and appeasing angry mortgage owners on the other, banks now face a much bigger bill if the EU court rules in favor of home owners, he says.
Claimants in the case before the EU tribunal argued abusive terms in their contracts enabled their bank, the local unit of Raiffeisen Bank International AG, to set rates unilaterally in violation of the law. In his opinion, the EU court adviser said local courts will have to decide whether the whole contract can be maintained once the illegal terms have been removed.
Markets were spooked last week when ING Bank Slaski SA’s CEO Brunon Bartkiewicz discussed the scale of provisions that banks would need to make following a negative EU court verdict.
Poland’s financial regulators said they’re closely monitoring the situation, amid concern that a negative ruling could destabilize a key industry for the entire country.
‘Panic Mode’
Still, bank executives have largely played down the threat of provisions wiping out their profits. Court cases notoriously drag on for years in Poland, where class action suits aren’t popular, making it difficult to predict the cost for individual banks.
Unpacking entire mortgage contracts could set a precedent for invalidating unfair elements of loan agreements or re-denominating the mortgages into zloty. Other terms could be kept unchanged, such as linking the costs of the loan linked to Libor, where rates are currently below zero, instead of the higher rates used by Polish banks.
As the EU ruling nears, creditors are staying on top of the latest developments, too. Many have pooled resources in lobby groups that attend parliamentary hearings, pressure politicians and stage protests. One group with about 11,000 members and calling itself “Stop Banking Lawlessness” plans an education campaign after the verdict to stimulate more suits.
https://www.bloomberg.com//news/articles/2019-08-04/poland-s-32-billion-mortgage-fiasco-gets-its-day-in-eu-court
a lot of this is due to the swiss franc sliding against the polish zloty. Currency valuations cause many of the problems world-wide when they move against each other. It's not the root cause but does not help.