Trying to lower costs for interest rate payments is a natural human ambition. But nothing is free of charge. Risks may be increasing when potential gains seem to be achievable. In credit terms this is often about exchange rate risks for borrowing in foreign currencies. (This problem is, by the way, usually part of my classes in the first semester).
These considerations on credit conditions may happen by applying three alternatives: comparing nominal interest rates between two countries, expectations of a stronger own currency or both of these two alternatives as a simultaneous mix. However, the mostly existing exchange rate risks make things particularly difficult and speculative; the calculations have to be based on a forecast – and everybody should know that currency forecasts in principle are impossible. In other words: a lot of luck is needed if a credit in foreign currency really turns out to be profitable. In my view, taking such a risk is neither prudent nor smart.
But these speculations happen again and again – despite all the negative stories about it. In Sweden, we have some bad experience from the times of devaluations around 35-40 years ago when greed or limited intellectual capacity led to massive loans in Swiss francs to Swedish farmers; later on, accidents happened with lending in yen for pure domestic Swedish purposes. The same kind of mistake was also committed before the eruption of the so-called Asian crisis in the late 1990s, with several countries in mainly South East Asia being heavily involved. And the story behind the financial crisis in the Baltic countries more recently was not very different either.
Unfortunately, Poland also went into this trap – an accident I did not expect ten years ago after having met so many well-educated and well-understanding leaders at this country’s central bank from as soon as the early 1990s. From around 2006 onward, however, too many new Polish mortgage loans were granted in Swiss francs, combined with strong expectations of an ever strengthening zloty. In 2008, finally, this development was reversed. The zloty weakened on trend. The central bank and the banks should have reacted before that. The zloty moved at last on a long-lasting downward trend. Thus, previous expectations of very favorable credit conditions were not met anymore.
Consequently, many mortgage credits in foreign currency have become very expensive in the past few years. For this reason, the Polish government now tries to launch a package for converting these burdening credits in foreign currency into stable zloty loans. However, his transmission will not be easy – and very costly, too.
The question remains: Will banks – and even central banks – ever learn?
Senior Professor of International Economics, Linnaeus University
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