East European Swiss franc loan defaults may deepen eurozone crisis - UBS


With 60% of Hungary's household debt denominated in Swiss francs and one in ten of these loans being non-performing, Hungary, Poland and Croatia are facing a 20%-30% chance of default if Alpine currency continues to rise

The eurozone debt crisis may deepen yet as eastern European borrowers who took loans in a strengthening Swiss franc struggle to repay western European banks, reports Bloomberg quoting UBS Wealth Management.

Lenders including Unicredit SpA (UCG)Erste Group Bank AG (EBS), Raiffeisen Bank International AG (RBI) and Bayerische Landesbank have 80 billion Swiss francs ($101 billion) of household debt in Hungary, Poland and Croatia, emerging-markets analyst Kilian Reber said. Borrowers face higher payments after the franc gained 9.5% against the forint, 14% against the zloty and 9% against the kuna in the past three months.

“Increased stress on Hungarian and also Polish and Croatian borrowers with Swiss-franc denominated mortgages and consumer loans could send shockwaves through the eurozone,” Reber said yesterday in a phone interview with Bloomberg

He assigns a 20% to 30% chance of a stronger franc triggering defaults in easternEurope and fanning the euro-region debt crisis by forcing western European banks to seek new bailouts.

The franc is this year’s best performing currency and considered as a haven by investors as the U.S. economy slows and Europe’s debt crisis pushes toward Italy and Spain.

More than 60% of Hungary’s household debt is denominated in francs, equivalent to 16% of gross domestic product, according to UBS Wealth Management. More than one in ten Swiss-franc loans is non-performing in Hungary.

Under the wealth manager’s base case, damage to western European banks will be limited as the Swiss economy slows and the central bank works to halt the franc’s advance. It forecasts the franc, which touched a record high of HUF 272 on Aug. 10, will weaken to HUF 210 in 12 months.

Western European lenders, which control three quarters of eastern Europe’s banking industry, have scaled back loans to each other as the debt crisis worsens and the global economy slows.

Banks deposited €128.7 billion overnight with the European Central Bank Aug. 22, more than three times this year’s average, instead of lending the money to other companies. Banks also borrowed €555 million from the ECB’s overnight marginal lending facility, up from €90 million Aug. 21.

European bank stocks have lost 20% as Royal Bank of Scotland Group Plc (RBS) and Societe Generale (GLE) SA declined 43% and 39%. The cost of insuring European bank debt against default reached a record yesterday, with the Markit iTraxx Financial Index of credit-default swaps linked to senior debt of 25 European banks and insurers rising to 252 basis points, compared with 149 after Lehman Brothers Holdings Inc. collapsed in 2008.

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