Sometimes you can hear a widespread opinion that financial markets resemble a casino, sometimes you are told prices of financial instruments do not reflect their fundamental values, but follow a random walk. Even if these assertions are half-truths, they must not be disregarded by anyone who wishes to be a market participant. If you enter a financial market, no matter if you buy, sell, borrow or lend, you take risks. Come to terms with it, put up, or ship out!
Over two years ago Poland witnessed sad stories of companies which speculated on currency options. In 2008 zloty strengthened, its appreciation was potentially detrimental to exporters, for who export sales would no longer be cost-effective. Banks found a solution to their problems – stricken exporters were offered an opportunity to buy currency options on sale of EUR at fixed rate, usually higher than market one. Unfortunately, such a hedge had to cost, so banks came up with a strategy called risk reversal. The rest was once described, there’s no need to repeat it.
Broadly at the same time, in 2008, Polish zloty (hereinafter PLN) hit its high against Swiss Franc (hereinafter CHF). Mortgage loans denominated in CHF were extremely popular in that time, as the housing boom was at its climax, and CHF gave the opportunity to have lower debt service costs, thanks to gradual decline of CHF/PLN exchange rate and lower interest rates in CHF. Then came the turmoil on financial markets and PLN plummeted against currencies of highly-developed countries, deemed to be safe havens. In early 2009 the trend again turned back and zloty’s value in other currencies was back increasing. 2011 saw Greek crisis and printing money in the United States, so EUR and USD began to be regarded as riskier assets, while CHF still enjoyed the status of safe haven and kept strengthening against other, also major, currencies. In July 2008 CHF/PLN rate was at its ever-time lows at around 2.00, in June 2011 it climbed near 3.40. This translates into financial standing of homeowners who have taken out loans in CHF in 2007 or first eight months of 2008 when CHF/PLN rate ranging from 2.00 to 2.50, and who now are facing a problem of mounting debts. Currently many of them have so-called negative equity (what’s the Polish for negative equity?), what means their outstanding debt is higher than the market value of their property, but this is not yet the biggest problem, since as long as they settle their monthly payments in time, banks do not raise any alerts. The bigger problem is posed by rising debt service costs. Monthly instalments, as loans, are also denominated in CHF and then converted into PLN. If a debtor’s rate is 500 CHF, holding everything else unchanged, when CHF/PLN exchange rate was 2.20, a monthly payment was 1,100 PLN. When the rate soared to 3.40, the instalment soared to 1,700 PLN. Makes a difference, doesn’t it. When loan repayments make up a small portion of a borrower’s income, a borrower stays afloat, but if a borrower could only make ends meet when CHF/PLN stood below 2.50 PLN, a borrower is distressed.
The parliamentary election is coming and politicians search for various ways of “buying” votes. Election year is usually a period when politicians from ruling parties are more eager to give away gifts and those staying as opposition have inclinations to come up with promises of gifts they will give away if they win. Some of the Polish politicians have taken a leaf out of Hungarian book and put forward to freeze the CHF/PLN rate at 2.75 for the borrowers who have taken out mortgage loans in CHF at rates lower than 2.75. The difference between the market rate and 2.75 would be paid by the state. But who is “the state”??? Yes, my reader, it’s you, it’s me, it’s every person and every company that pays taxes in Poland. And this ridiculous idea is just another bail-out. Someone has taken a loan in a foreign currency and exposed themselves to a currency risk – cool, now they have to face the music. The scenario in which CHF/PLN goes up by at least 50% should have been taken into account when the decision to take the loan was made! And banks should have prepared sensitivity analyses, but as far as I know the recommendation of Polish Financial Supervision Authority that curbed lending in foreign currencies came into force some two years too late…
This is actually not the first time, in 2009 deputy prime minister Pawlak proposed to cancel legally valid option contracts between stricken companies and banks. The idea to freeze the CHF/PLN rate is not as shockingly silly as the Pawlak’s attempt to turn back time, but will not meet my approval.
On this blog there will never, ever be any consent for bailing out risk-takers. Either you take a risk and accept the rules of the game – you win or lose, or you just don’t engage in risky transactions. If there is to be a relief for troubled borrowers, why doesn’t somebody return me let’s say 200 PLN out of almost 900 PLN I lost recently on the stock market? I knew how aggressive speculation could end up and this time the worst scenario materialised. I made a mistake and covered the loss-making position far too late, thus incurring a bigger loss, but I’m the only one to blame, and I have no right to moan, just as some people with “encumberance in Swiss currency” do. I’m sick of listening to them griping and tell them politely that if they made their bed, they have to sleep in it. And they politely shut up… Maybe I’m ruthless, but those people really have to suffer consequences of their decisions.
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