In response to my article on currency controls and QE feuding in many countries (See South Korea, Hong Kong, Brazil, China, Volcker Complain about Bernanke’s QE Policy), reader Robert has some personal observation on happenings in Poland.

Robert writes …

Hi Mish,

I’m a long time reader of your blog – congratulations on doing such a good work for so long!

I’ve just read your recent post on international reactions to QE2 and the threat of worldwide capital controls. I have something to add here from my country.

In Poland, there has been a bubble in real estate since 2006-2007 that never really popped. Condo prices in downtown Warsaw (capital of Poland) are comparable to prices in Berlin and Vienna, and of course incomes and standard of living are way way lower.

Real estate prices have fallen 10-15% from the peak alright, but incidentally our currency has recently strengthened, so the net result from the international perspective is nearly zero. Real estate prices has been fueled, as is typical for the whole region of central-eastern Europe and Baltic States, by cheap capital denominated in CHF (Swiss Francs) and EUR (earlier in the decade USD), coordinated mainly by Austrian and Italian banks and originating in Switzerland and ECB.

With this situation, there is a growing pressure, at least a year running, from our central bank and partly from the finance ministry to curb the inflow of cheap money and seemingly – although it is never openly admitted – to try and prick the real estate bubble, the bubble that has indeed reached a ridiculous size and is pushing more and more families into debt servitude.

There has been a series of banking regulations (“recommendations”) issued by Komisja Nadzoru Finansowego (Commision of Financial Supervision) that targets inflows of cheap money. The curbing is effected mainly by reining in the mortgage market, that has been – again, as is typical for the whole region – the main venue of external capital inflow. Recently there have been two important regulations issued on that matter. Recommendation SII(effective January 2011) mandates that banks should have no more than 50% mortgage portfolios denominated in foreign currencies and effectively mandates (at least for the not very wealthy customers) that mortgages be issued for no more than 25 years. Recommendation T (effective September 2010) mandates that LTV for forex mortgages should never exceed 80% and that banks must consider harsh changes in the interbank market rates when qualifying customers for such loans.

It has been also recently discussed that possibly somewhere in 2011 a regulation will be passed that completely cuts people off from foreign currency mortgages unless they actually have assets (other than real estate itself) that can balance the Forex risk or Forex earnings.

Such regulation would effectively almost totally cut off cheap external mortgage financing.

There has also recently been a change in language of Polish banking regulators. It is now quite openly said that the practice of selling very long term, adjustable rate mortgages denominated in foreign currency should be literally “brutally and completely curbed” (words of the chairman of NBP, our central bank).

This is a process that is slowly but regularly unfolding and will surely take some more time; cheap EUR mortgages are still widely available and will be at least until the end of 2010. But it seems that the process of curbing capital inflows is gaining pace rapidly in Poland and it should bear very concrete fruits in 2011 and 2012,
especially taking into account recent acceleration in Fed lunacy that could (and I expect it will) spur counter reactions in my country analogous to what is happening in Korea or Brazil. There are no reactions as of yet, but I expect them soon.

It should perhaps be added that Polish banking regulator bodies and central bank are quite independent from the government and it seems that this independence is factual, not merely statutory; there have been many episodes in the last decade that NBP was in harsh conflict with the govt.



Poland Stats: 62% of Mortgages, 23.9% of Corporate Loans made in Foreign Currencies

In a followup question I asked Robert what percentage of mortgages in Poland were in foreign currencies. Here is Robert’s response …

Hello Mish

This is straight from the central bank’s data: 158203.4 M PLN foreign currency (56.64 billion USD, 62.03% total), 96837.7 M PLN domestic currency (34.67 billion USD, 37.97% total). All USD values calculated according to current Forex ask rate.

That was household mortgages. On the other hand, statistics of corporate credit show the exactly opposite behavior: 157110.5 M PLN domestic currency (56.25 billion USD, 76.1% total), 49335.7 M PLN foreign currency (17.66 billion USD, 23.9% total).

Forex corporate credit is quite steadily declining (in nominal terms) since february 2009, as well as domestic currency corporate credit. What is perhaps more alarming (especially that real estate prices are slowly but steadily declining) is that household mortgage credit is relentlessly growing as if no financial crisis occurred at all and the good times roll; domestic currency mortgages are up 29.3% nominally yoy, foreign currency mortgages up 12.3%.

The recent deceleration in growth of Forex household mortgages and acceleration in domestic currency mortgages is attributable entirely to a special government financial program (“Rodzina na Swoim”, “Family on its own”) that lets you get a domestic currency mortgage with extra payment from government that amounts to 0.25-0.5 of interest paid, so effectively the interest on such mortgages for the final customer is 0.5-0.75 of “normal” market rate; that might finally amount to 2.7-4% – such rates are comparable to what one can get for forex mortgages (in spite of rates in Poland being in theory a healthy 2.5-3.5 percentage points above Switzerland, ECB or USA), so it is understandable that there is a lot of demand for domestic currency mortgages currently.

What should be stressed is that this special payment program is phased out in 2011 (our government has recently a very hard time explaining to the public opinion and independent economists why the deficit and debt grows so quickly; there are indeed many austerity pressures); as of January 2011 it will be offered only to people buying new development real estate and some time in 2011 H2 (don’t remember exactly when) the program expires entirely.

It is widely and correctly expected that if this happens and the supply of foreign currency credit is not curbed, people will again widely take on mainly EUR, and to a lesser amount CHF and USD denominated mortgages. This scenario is apparently explicitly targeted by the banking regulators, as I wrote in the earlier mail.

It should be added that nearly all mortgages in Poland are ARMs with interest invariably calculated as WIBOR (polish interbank market rate)+margin or LIBOR/EURIBOR+margin. The margin typically is, depending on LTV and customer’s creditworthiness (which actually IS checked quite thoroughly), 1.1-2 percentage points for PLN and EUR mortgages and 2-3.5 percentage points for CHF and USD mortgages.

3-month WIBOR (interbank rate for PLN deposits) is currently at 3.85%, the yield curve is normal and not very steep (both for interbank rates and govt bonds). Polish central bank, as most central banks do currently, targets short term rates which is understandable from their viewpoint as it allows almost full control over both commercial credit and mortgage rates – as I said earlier, almost all mortgages are ARMs indexed to short-term interbank rates. Interest rate swaps for foreign currencies are nearly unavailable to “mere mortals” in Poland and domestic currency IRSes are simply non-existent (no demand I guess, everyone is happy with plain ARMs).

Wow, I just described like a half of Polish financial market. Cheers,


Thanks Robert! I always appreciate emails like yours so readers in the US can find out what is really happening in Europe.

Mortgages denominated in foreign currencies are a disaster waiting to happen, not only for the debtors but to the banks that made the loans.

Mike “Mish” Shedlock
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