Poland

Or how the benefits to some will be paid for by others.

Hungary nationalised private pension funds’ assets – Poland did it as well (although in a slightly different form). Hungary forced banks to pay for CHF loan losses of their clients – Poland is about to do it as well.

On the Polish pension reform, I have to admit the government probably did the right thing and maybe people will be better-off. As a capital markets person this statement is usually met with disbelief by many of my colleagues. But I think that if some conditions and assumptions are met, participating in a pay-as-you go system may mean higher pensions later. If the labour force grows, if the economy goes up the skill latter and if the rules are fair and remain fair for 30-40 years, then it is possible. And here in Bulgaria our opinion about Poland is so high that we tend to believe in these assumptions... for Poland; not so much for Bulgaria. 

The recent law on Swiss franc loans is a challenge to my trust in Polish politicians. And I want to make it clear right away – I am not here to defend banks. We have seen them rig exchange rates and interest rates; we have seen them lie to investors; we have seen them abuse their dominant position against retail clients. They have taken too much risk with insured deposits and taxpayers have had to pay for these risks. The entire industry in Europe and the US needs to get back in order and recent legal measures are hardly going to be enough.

What Polish lawmakers just did is definitely a big step in the wrong direction. This is how it looks from the eyes of an outside observer. Some people, arguably a large number of individuals, took loans denominated in a foreign currency and benefitted from the much lower interest rates in that currency. No lunch coming for free though, these people were bearing a currency risk, as most of them did not have revenues in Swiss francs. And now that the inevitable finally happened and the Swiss franc appreciated (although abruptly), it was time for them to start paying the bill. However, because they are probably with lower income, because they are a lot and thus meaningful to the economy overall and let’s face it mainly because Poland is in an election year, politicians from all parties, are trying to please these people and force the banks to pay.

I have several problems with this approach. First, even people who are not that much in need will get to benefit. Probably there are people who are able to service their loans even at the higher Swiss franc exchange rate, but they will be able to convert. Probably a better approach would have been to provide tax relief for people who are really struggling with their loan repayments. Second, the populist rhetoric “let’s make banks pay” is not going to work for two main reasons. Polish banks are not owned solely by foreigners. Polish people in various forms (through OFE, TFI, direct ownership of listed shares, the taxpayers’ ownership of state-owned banks) have exposure to the banks share capital and they are already losing money because of the fall in stock prices. Second, usually banks owners are not the only ones to pay for such things. Banks have an amazing ability to make other clients (all clients) pay for the benefits of some clients (or the mistakes of management for that matter). All other clients will end up paying slightly higher interest rates on their loans, than they should have. They will be paying higher fees and commissions and will be receiving a lower quality of service. But all this is likely to be spread over the long term and would be difficult and abstract to pin-point and measure.

My biggest reason for not liking the law is that it helps banks’ managers escape. People now say banks will lose money because of the law.  Banks have already lost that money… probably even more money not because of the law, but because they took more risks; mainly by giving loans to people who could not afford to take a loan in the first place.  Without this law, some people would have defaulted on their loans, because not able to pay the higher instalments and also because their properties are now worth less than the loan. How much would these losses have been? More or less than the conversion loss due to the law… we would probably never know. One would argue clients have been misled and did not understand the risks of borrowing in foreign currency. I however doubt that. Even without deep financial knowledge, most people know (maybe instinctively) that nothing in life comes for free. They were just hoping the bill will be presented to them later… and hoping by that time they would be better-off and able to pay it… and probably smarter ones were hoping someone else will end up paying the bill. And this is exactly what is about to happen.  

I would blame bankers for something else though. They took higher risks, probably knowingly, by giving loans to people who otherwise would not qualify. Whether a person qualifies for a loan is often measured by comparing its disposable income to the monthly payments on the loan. For mortgage loans, the interest rate represents a very big portion of the monthly instalment in the first years. Thus, a lower interest rate reduces significantly the monthly payment and makes much more people eligible. To put this practice into perspective, the financial crisis in the US started after a lot of mortgage loans turned bad. Lenders in the US used other technics to give loans to more people without worrying about the risks. They had interest-only loans (without repayment of principle at all) and loans where the interest rate was very low the first year and was getting higher after that. So the monthly payments in the first year were really low, thus making a lot of people meet the criteria. They also gave loans for 100% of the value of the property. At some point, such loans became delinquent even after the first monthly payment - people took loans and did not make even one payment on them! And banks continued to give out more loans to the same sort of people.

And now Polish bankers, at least some of them, should actually be thankful to the Polish politicians for passing this law. Everybody will be blaming the law for the losses in the banks. Nobody will blame the bankers for the higher risks that were taken; risks that were taken probably with the main purpose of getting bigger bonuses now, without worrying about the consequences later.