As inflation rises and recession looms in Poland, a break in mortgage payments will be a much-needed reprieve for Jakub Rdzanek and his wife.
The couple have seen their monthly home loan bills rise by more than 70 per cent since the start of the year as the country’s central bank raised interest rates to combat rising prices.
“Our mortgage has become scary all of a sudden,” said Rdzanek, who bought his flat in Warsaw last August.
The Rdzaneks are not the only household breathing a sigh of relief after the Polish government put a moratorium on mortgage repayments last Friday.
The move will allow borrowers to suspend payments for eight months, split between this year and next. But while the Polish government is giving mortgage holders a credit holiday, banks are warning it will eat into their profits.
Lenders also claim the right-wing government is giving borrowers the mortgage holiday to boost its chances of winning national elections next year. The outcome could depend on whether Poland’s economy can withstand the double whammy of rising inflation and the war in Ukraine.
Eastern Europe is not the only one looking to ease the pain; Governments around the world are facing the challenge of curbing high inflation by raising interest rates as the cost of living crisis casts a shadow over the global economy.
Banks have been a target for other governments. Hungary recently announced a €2bn tax on lenders and energy companies, while Spain said it would tax banks €1.5bn a year. Romania is also considering easing mortgage payments for households hit hardest by inflation.
“This idea is obviously starting to catch on elsewhere, so it’s something we have to keep an eye on,” said Simon Nellis, managing director of European bank research at Citigroup. “This is clearly a concern for bank equity holders.”
Unlike the Romanian proposal, Poland’s policy is not being tested. Some Polish regulators had urged the government to limit the scope of the moratorium. “There are also rich people who don’t need this exemption,” Adam Glapiński, governor of the National Bank of Poland, told a news conference last month.
Glapiński also questioned whether the law goes “in a different direction” from the central bank’s monetary tightening efforts. Poland raised its benchmark interest rate in July for the sixth consecutive month to 6.5%, after inflation hit a 25-year high.
Some bankers have even suggested that the government has launched a crusade against them. Jarosław Kaczyński, leader of the main ruling party, Law and Justice, recently proposed an extraordinary tax on banks that did not pay enough interest on deposits.
Polish banks were poised to report strong earnings, but now estimate a combined cost of about 20 billion zlotys ($4 billion) if all eligible mortgage holders skip monthly payments. The moratorium only applies to mortgages contracted in zlotys.
Poland’s two largest banks, PKO and Pekao, which account for 40 percent of the national mortgage market, will be most affected by the change. But the Polish arms of foreign lenders Santander, ING, Commerzbank and BNP Paribas will also suffer.
Commerzbank expects that 60 to 80 percent of mortgage holders at its Polish subsidiary, mBank, will take the credit holiday. The bank is considering legal action against the Polish government. “Unfortunately, the new legislation in Poland results in considerable one-off charges,” said Commerzbank CFO Bettina Orlopp.
Citi’s Nellis expects some banks to take the issue to court, despite the poor track record of previous attempts to force governments to change mortgage policy. “The government is getting involved and retroactively changing the contracts, which seems a bit naughty,” he added.
Poland’s housing market is highly exposed to rate fluctuations because the vast majority of Polish mortgages have a variable rather than a fixed rate. In Romania, variable mortgages account for more than 70 percent of new loans, prompting the government in Bucharest to propose a mortgage holiday.
Some economists warn that Poland’s credit holiday could backfire, as monetary tightening already threatens to push the economy into a technical recession in the coming quarters.
“Banks can be more selective when it comes to providing financing,” said Marcin Kujawski, senior economist at BNP Paribas’ Polish subsidiary. The moratorium, he warned, “may lead to tighter credit policies, as well as more entrenched inflation, which could possibly require more interest rate hikes than would otherwise be the case.”
In another move, the government has been seeking a new type of interbank loan since January.
However, banks are warning that a reform of the Warsaw Interbank Offered Rate, similar to that undertaken to scrap the scandal-tainted Libor rate, which took years to enter into force, is not being rushed vigor BNP Paribas is one of the banks warning that changing Poland’s rate could lead to international lawsuits.
“This is a massive reform, it means revaluing all portfolios and also all hedging instruments,” said Przemysław Paprotny, who heads PwC’s financial services practice in Poland. “We have to remember that Polish banks cover interest rate and currency risk, and this is contracted to international parties.”
Despite the turmoil in the banking sector, Paprotny said Polish banks’ balance sheets were strong enough to withstand the moratorium. “We do not foresee any dramatic situation that would require discussions about immediate capital injections,” he said.
The Polish banking market is still embroiled in a decade-long court battle over who should shoulder the cost of Polish homebuyers who opted for Swiss franc mortgages in the early 2000s, when Switzerland had much lower rates than poland After the financial crisis of 2008, the cost of these mortgages increased, in line with the appreciation of the Swiss franc against the zloty.
Agnieszka Accordi, audit partner at PwC, said reviewing how borrowers finance their homes made sense in the context of Swiss mortgages. Poland, he said, should seek to “close the discussion about whether customers understand what they pay for.”
When Rdzanek and his wife bought their apartment in Warsaw last summer, their real estate agent advised them to use a variable rate for their mortgage. “It’s a decision I regret,” Rdzanek said. The administration fees charged by his bank had also risen sharply in recent months.
Even at a time of intense political polarization in Poland, the moratorium passed overwhelmingly in parliament, with the support of a left-wing opposition that wants to share credit for helping consumers rather than banks.