Examining How a Strong Swiss Franc Could Single-Handedly Topple Poland’s Economy

At the start of 2015, Switzerland ended a cap on the value of the Franc relative to the Euro. Before this, it had been pegged at 1.20 Swiss Francs for one Euro. After the cap was removed, the Swiss Franc increased in value against the Euro by 30 per cent. The currency increased by 25 per cent in value against the United States dollar, also. However, this change in valuation has the greatest impact on nations with weaker economies, whose citizens borrowed heavily in Swiss Francs at the old exchange rates.

The Swiss Franc cap was originally put in place to prevent the currency’s value from being changed too much by investors who bought the currency as a safer alternative to the Euro. It removed the cap because it considered the period of exceptional overvaluation because of this foreign demand to be over.

Switzerland has one of the highest standards of living in the world and is home to many exporting companies. When the Franc is expensive, it hurts Switzerland because exports are worth 70 per cent of its GDP. Before removing the valuation cap, the Swiss National Bank had increased the supply of Francs to meet the Euro-Franc ratio. Removing the cap ended the need to print more Francs and reduced the money printing that some feared would lead to hyperinflation in Switzerland. Experts at Lear Capital precious metals have previously stated that holding gold is a good hedge against hyperinflation, which is why, until the 1990s, Switzerland had its currency partially backed by gold. Ending its monetary printing obligations also prevents Switzerland from devaluing its currency as the European Union devalues its own currency with quantitative easing.

Ending the fixed Franc to Euro ratio has helped dampen the money pouring into Switzerland as a “safe haven”, with people from around Europe and even Russia buying Swiss currency, stock and real estate. Others simply took out loans in Swiss Francs instead of their own countries. This created a bubble for the Swiss economy but it wanted to have the ability to deflate, even if the European economy collapsed.

According to the European Central Bank, more than half a million Poles took out loans in Swiss Francs worth over $40 billion. These loans are worth around eight per cent of the Polish gross domestic product and account for almost a third of all mortgages. Servicing the loans accounts for about 0.2 per cent of the overall Polish economy, a percentage that grows along with the value of the Swiss Franc. According to Reuters, eight per cent of Swiss Franc loans were nonperforming, or behind, as compared to three per cent of loans issued in Poland’s own currency.

How did such a large part of the Polish housing market get tied to the Swiss currency? Borrowers did this, in part, because of the much lower interest rates in Switzerland than in Poland; up to a third of the interest charged for loans in Polish zlotys. The impact of the, now much stronger, Swiss Franc is an increase of 20 per cent or more for mortgage payments for half a million Polish citizens because of the shift in currency valuations.

Hungary tried to solve a similar problem there, by forcing banks to convert mortgages issued in Francs to forints at far below-market exchange rates. This reduced the mortgage payments required of borrowers but hurt the banking sector by forcing it to accept heavy losses.

Poland refused to force banks to make a similar conversion, instead encouraging a gradual, voluntary conversion of the loans. This has hardly occurred. A large scale forced conversion of Franc loans to zlotys, at current ratios, would collapse Poland’s banking sector, said Poland’s central bank governor, Marek Belka, in April, 2016, according to the Financial Times. Lending would halt because of the lack of money to do this. Furthermore, Poland does not want to do anything that hurts its banks’ ability to lend money, since this is seen as necessary for fuelling economic growth.

Selling these properties won’t help, either, because Poland’s property bubble has collapsed. This was because many people were the first in their families to get a mortgage and the value of desirable properties was bid up. Therefore, banks can’t afford to foreclose on the properties with expensive foreign mortgages and sell them to others.

There have been suggestions that Poland’s central bank bail out the smaller banks by making the conversions, but then it would be the public on the hook for the literal cost, many of whom are already struggling to make Swiss Franc mortgage payments. It would also provoke a loss of trust in the banking system. That would be a double whammy in a nation where the young are the first generation in its history to take out mortgages and in a world trying to get rid of cash.

Compounding the issue is the fact Poland has already levied a tax on bank assets, especially foreign currency — so Polish banks literally can’t afford to absorb more losses. Demanding the banks convert loans to Polish currency could kill them — and Poland’s economy. Poland also lacks the large gold reserves Switzerland has (though much of it has been moved to the US) to back up its currency, which makes it a lot more volatile.

Buying securities or taking out loans in a foreign currency may seem like a good idea, until that currency’s value goes up, or your own currency goes down, in value. When done on a national scale, one risks severe financial collapses, as were seen in Iceland or slow grinding economic ruts as currently prevails in the European Union. Owning your home or other tangible assets outright are the few safe investments available.


The views expressed in this opinion editorial are the author’s own and do not necessarily reflect Emerging Europe’s editorial policy.

About the author

Boris Dzhingarov

Boris Dzhingarov

Boris Dzhingarov is a marketer and a journalist. He graduated from he the University of National and World Economy (UNWE) in Sofia with a major in marketing. He contributes for multiple websites and portals: Tech.co, Semrush.com, Tweakyourbiz.com, Socialnomics.net. He is also is the founder of MonetaryLibrary and Dzhingarov.com.

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