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Poland's $32 Billion Mortgage Fiasco Gets Its Day in EU Court

Maciej Martewicz

(Bloomberg) -- From his beginnings setting up a one-man law firm in Warsaw, Jacek Czabanski has become a crusader for Poland’s struggling mortgage holders, fighting a battle that stands to reshape the country’s powerful banking industry.

Since 2015, Czabanski has been busy building a case for several hundred mortgage holders who have sued their banks for what they say are unfair practices on foreign-currency loans. And what he says started as a general-interest occupation and initially looked like a moonshot has lately turned into a more realistic scenario. Banks are taking note.

“Four years ago, they were treating all the suits as a fantasy and weren’t paying too much attention,” Czabanski said. “Now they are afraid.”

A non-binding opinion by an adviser to the European Court of Justice in May said Polish courts can’t maintain abusive terms in foreign-currency loan agreements. That view has dramatically shifted the risk perception. The Polish Banking Association estimates the cost of a negative ruling at 60 billion zloty ($16 billion), or about four years of the industry’s profits. Banking stocks have come under pressure in recent weeks, as investors fret over the outcome of a final ruling expected from the Luxembourg-based court as soon as next month.

Wrong Bet

At the heart of the issue is a clever bit of financial engineering that many Polish home buyers enjoyed before the 2008 financial crisis. Assuming that the zloty would indefinitely maintain its value-increasing run, mortgage holders took out foreign-currency denominated loans, with the Swiss franc proving particularly popular.

But when markets turned in the wake of the global banking meltdown, the equation no longer worked as the zloty began its long descent. To date, the currency lost about half of its value against its Swiss counterpart over the past 11 years. Poland now faces the burden of $32 billion in non-zloty loans that have left many homeowners struggling to reduce their debt or have pushed them underwater with mortgages exceeding their property values.

So far, about 8,000 lawsuits have been lodged in Polish courts by foreign-currency mortgage holders, with creditors winning about 90% of the 70 rulings handed down this year, according to Czabanski. Most verdicts can be appealed, he added, and higher instance courts are waiting for guidance from the EU’s tribunal.

Falling Shares

Investors are starting to listen, with an index of Polish banks dropping 7% in the past two weeks on concern the industry will need to take massive provisions if the EU tribunal rules against lenders. Banks with the biggest foreign-loan portfolios, including Bank Millennium SA, Getin Noble Bank SA and MBank SA, have lost about a fifth of their value in the past month.

The concern for banks and their investors is that a favorable ruling on potentially abusive clauses in loan agreements could trigger a litany of lawsuits from the roughly 600,000 Polish families holding such loans. The counter-argument goes that even with such a verdict, it will take years for any change to take hold as cases wind their way through the legal system.

More to Come

Either way, the litigation to date is merely the tip of the iceberg, according to Czabanski. Having spent years neglecting the issue, and with politicians shifting awkwardly between protecting the biggest lenders on the one hand and appeasing angry mortgage owners on the other, banks now face a much bigger bill if the EU court rules in favor of home owners, he says.

Claimants in the case before the EU tribunal argued abusive terms in their contracts enabled their bank, the local unit of Raiffeisen Bank International AG, to set rates unilaterally in violation of the law. In his opinion, the EU court adviser said local courts will have to decide whether the whole contract can be maintained once the illegal terms have been removed.

“The current situation is probably the most difficult ever for Polish banks,” said Maciej Marcinowski, an analyst at Warsaw-based broker Trigon Dom Maklerski SA. “It was possible to mitigate previous political plans, to lobby for better terms. But now, that’s not an option: the ruling is unavoidable and the risk is bigger.”

Big Losses

Markets were spooked last week when ING Bank Slaski SA’s CEO Brunon Bartkiewicz discussed the scale of provisions that banks would need to make following a negative EU court verdict.

“In our case, in the negative scenario, it could mean a loss in a single quarter,” he said, citing the bank’s small Swiss loan portfolio. “For our friends on the market, it could be a number of quarters.”

Poland’s financial regulators said they’re closely monitoring the situation, amid concern that a negative ruling could destabilize a key industry for the entire country.

“The regulator will have to step in to help out banks,” said Tomasz Noetzel, an analyst at Bloomberg Intelligence. “The scale of potential costs is too big for the industry to handle alone.”

‘Panic Mode’

Still, bank executives have largely played down the threat of provisions wiping out their profits. Court cases notoriously drag on for years in Poland, where class action suits aren’t popular, making it difficult to predict the cost for individual banks.

“I’m not in a panic mode and there will a lot of time before a clear line of ruling by Polish courts is formed,” MBank Chief Executive Officer Cezary Stypulkowski said Aug. 1. The Commerzbank AG unit had 13.8 billion zloty in Swiss loans as of June 30 and is facing lawsuits regarding loans worth at least 377 million zloty.

“Let’s wait,” Bank Millennium CEO Joao Bras Jorge told reporters last week, when asked about the impact of the EU verdict. He doesn’t expect any uptick in lawsuits.

Unpacking entire mortgage contracts could set a precedent for invalidating unfair elements of loan agreements or re-denominating the mortgages into zloty. Other terms could be kept unchanged, such as linking the costs of the loan linked to Libor, where rates are currently below zero, instead of the higher rates used by Polish banks.

Generational Issue

“This could be a crisis-generating scenario,” Krzysztof Pietraszkiewicz, head of the Polish Banking Association, said last week. “It would be an irrational situation, in which banks lend out money more cheaply than they borrow it.”

Czabanski, the lawyer, now operates branches in three Polish cities to keep up with the work. The issue has taken on the form of a generational crisis, because many of those affected are young first-time buyers now feeling trapped in their mortgage contracts, he says.

As the EU ruling nears, creditors are staying on top of the latest developments, too. Many have pooled resources in lobby groups that attend parliamentary hearings, pressure politicians and stage protests. One group with about 11,000 members and calling itself “Stop Banking Lawlessness” plans an education campaign after the verdict to stimulate more suits.

“We will do everything in our power to have as many claims as possible because this is the only chance to close this chapter of toxic debt,” said Barbara Husiew, deputy director of the group.

--With assistance from Adrian Krajewski and Piotr Bujnicki.

To contact the reporter on this story: Maciej Martewicz in Warsaw at mmartewicz@bloomberg.net

To contact the editors responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net, Benedikt Kammel

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