Aleksander Bochenski made his money in food processing but last year, when he had an unneeded zloty hedging contract, he decided to keep it open, figuring that, with the zloty on a long-term strengthening trend, it would be easy money.
“There was an element of speculation,” he admits.
However, the zloty has dropped by about 40 per cent against the euro since the summer and Mr Bochenski lost 350,000 zlotys ($9,400) in January alone.
Now he is in conflict with his bank, BRE, a unit of Germany’s Commerzbank, over additional hedging contracts that he needs to secure his export business.
“I’m able to handle the losses – I’m not crying,” he says.
Not all companies have been so lucky. Several have had to declare bankruptcy and the Financial Supervision Agency, Poland’s financial markets regulator, estimates that losses on ill-timed hedges could come to 15bn zlotys – about 20 per cent of corporate profit – in 2009.
Rising problems with currency options are just one sign of the difficulties that central European banks face because of the sudden fall in local currencies against the dollar, euro and Swiss franc.
A recent report by Moody’s, the rating agency, found local currency depreciation to be a significant risk to the region’s banks, accelerating asset quality deterioration, potentially shrinking funding bases if customers transfer savings out of local currencies, and affecting capital adequacy ratios.
All those things are now happening.
Watching the zloty’s violent swings against more stable currencies has become a national obsession. Red graphs dominate newspaper front pages and television news and the subject is a staple of dinner conversation.
About 70 per cent of Polish mortgages are denominated in foreign currency, mostly Swiss francs, and many borrowers are beginning to feel the pain.
“I am noticing the higher payments but I keep reminding myself that I took on the mortgage for many years, so hopefully this will be a short-term problem,” says Wojciech Heydel, a Warsaw mortgage broker.
So far, banks are not reporting a dramatic increase in problem home mortgages.
In Poland, non-performing loans make up 4.5 per cent of outstanding loans, slightly lower than during the first half of the year, while in the Czech Republic NPLs are at 3.5 per cent. However, problem corporate loans are growing.
The worry is that if the zloty and Hungarian forint stay at current levels, or drop further, those numbers will get a lot worse.
“Hungarian and Polish household debt has increased by a significant amount,” says Jiri Stanik, an analyst with Wood & Co, a Prague broker. “If unemployment goes up, people will have a significant problem repaying their loans.”
The sagging currencies are having an effect on capital adequacy ratios of banks.
In Poland, the ratio for the banking sector as a whole dropped from 11.5 per cent at the end of the third quarter to 10.8 per cent at the end of the year.
The effect of the weakening zloty was so strong the loan portfolio of Polish banks grew by 40bn zlotys in the last quarter of the year purely because of depreciation.
“Such violent currency changes increase risks for clients and the banking system,” says Krzysztof Pietraszkiewicz, head of the Association of Polish Banks.
Poland’s government is mulling over schemes to help companies with hedging problems.
The problem is very unevenly distributed across the region. Poland has problems with options and foreign currency mortgages but one of the healthier economies in central Europe, while the Czechs have almost no forex lending but an open economy that is being battered by the slowdown in Germany. Hungary has both large foreign exchange lending and a strained domestic economy.
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