Zloty Investors Beware of EU Ruling on Polish FX-Loans, ING Says

(Bloomberg) -- The issue that's playing havoc with Polish bank valuations is set to spill over to investors holding government bonds and the zloty, according to ING Bank Slaski SA.

An index of Warsaw-listed banks has dropped nine of the last 10 days on concern that a looming verdict by the European Union's highest court will force lenders to make massive provisions against the industry's $32 billion in foreign-currency home loans. While the Polish currency and bonds have been relatively unaffected, that will change if the EU tribunal rules in favor of mortgage holders, according to Rafal Benecki, chief economist at Slaski in Warsaw.

“If the EU tribunal issues a ruling that hits banks, it will instantly weigh on both the zloty and Polish debt,” he told Bloomberg. In a negative scenario, Polish banks may need to curtail lending to shore up liquidity positions, endangering growth prospects for the $586 billion economy, he said.

Click here to read more about Poland's mortgage fiasco

ING said that Polish banks may need to book provisions worth as much as 80 billion zloty ($21 billion), or 20 billion zloty more than forecast by the Polish Bank Association in June. There may be a silver lining for bonds, Benecki said, as banks that create provisions may opt to hold the assets in government notes.

ING Bank Slaski economists said in a report on Monday that they spoke with foreign investors, who they said have not taken the EU verdict risk into account “at all.” The lender expects the zloty to stay on the weaker side of 4.30 per euro this month, while bonds may also be in for a “dangerous” ride in August.

The Luxembourg-based EU tribunal is expected to rule on the validity of potentially abusive clauses in Polish mortgage agreements as early as next month.

To contact the reporter on this story: Adrian Krajewski in Warsaw at akrajewski4@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Wojciech Moskwa, Piotr Bujnicki

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