Central Europe’s Mortgage Mortification Moral

Central European currencies and stock markets reeled with the Swiss National Bank’s surrender of the multi-year euro-franc ceiling reviving mortgage worry that had faded since the decision.  In Poland total CHF debt is over 9 percent of GDP, with household borrowers representing 7.5 percent, and the opposition Law and Justice Party noting Hungary’s populist schemes has campaigned on a reduction platform which may now be more fully embraced with the sudden consumption and debt-servicing blow to the economy. Domestic demand continues to be the main driver of 3 percent GDP growth and should be helped by lower oil prices and EU projects, but with deflation the central bank was expected to cut rates before the Swiss franc surprise. The fiscal deficit was due to exit Brussels’ excess procedure near-term as public debt dropped to 45 percent of GDP with private pension Treasury bond cancellation. Exports have collapsed to Russia and Ukraine but a small current account surplus is projected and direct and portfolio investment inflows remain positive bolstered by a 2-year $22 billion flexible credit line. The backstop has offered non-residents comfort to retain 40 percent of local debt, but may not be tapped just for mortgage refinancing. Hungary escaped the worst with the recent EUR 15 billion conversion under November market rates allowing a 25 percent external debt drop through 2018, despite EUR 1 billion in continued bank funding retrenchment. The loan/deposit ratio is down to 100 percent and the one-quarter NPL ratio for foreign currency mortgages should ease to foster 2.5 percent consumption-led growth this year. With negative inflation the central banks should again lower rates as the budget gap meets the 3 percent of GDP Maastricht target. A few big foreign investors like Templeton have held positions but the overseas share of domestic debt has been trimmed with public liabilities still at 80 percent of output and unchanged post-crisis. With the mortgage escape main listed bank OTP was buoyed but it still has losing operations in Russia and Ukraine as the MSCI index crumpled 35 percent on an annual basis. Czech shares also slid double digits as it moved toward a minor current account deficit on 2.5 percent growth and no inflation, but the euro-koruna cap came under scrutiny with the Swiss ready abandonment. Officials maintain that the regime will last through 2016 unless price raises suddenly attain the 2 percent goal and the hodge-podge ruling coalition without a common monetary view is unlikely to advocate for immediate change, analysts believe.

Romania stocks were caught in the maelstrom with a 30 percent annual loss after the central bank earlier eased reserve requirement for FX liabilities with lending off 10 percent in 2014. President Johannis, an ethnic German from the opposition party, took office with a pledge to press hundreds of corruption cases as EU and IMF missions endorsed the 2015 budget as the latest program tries to avoid repossession after delinquency.