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How Switzerland shocked the world, and what it means for eastern Europe

The Swiss National Bank’s January decision to remove the Swiss franc’s cap against the euro has sent shockwaves through the global economy, writes Piroska Nagy. It triggered particularly strong reactions in parts of central and south-eastern Europe, where currencies in some countries came under severe pressure. Although markets seem to have overreacted, the events were both a legacy of the bad banking practice of foreign currency lending to unhedged borrowers before the global financial crisis and a call for countries to intensify their efforts to strengthen their economies.

In the first place, countries need to scale up their work on building local capital and currency markets to reduce their dependence on foreign funding and exposure to the inherent volatility of exchange rates. Significant progress has been made in recent years, but there have also been reversals, such as the cut-back on private pension funds that virtually wiped out this important investor base in several countries.In addition, regulatory frameworks have been improved to make banks more resilient.

The European Bank for Reconstruction and Development (EBRD) has been at the forefront of such endeavours with its Local Currency and Capital Markets Initiative. It is a complex process that needs the involvement of many levels of society. But we now have a window of opportunity: the environment for local currency development has become favourable as inflation has declined. Current accounts have also adjusted in many countries and reserves are higher, potentially supporting ‎a (partial) exchange in local currency.

While these are longer-term measures, the immediate impact of the sharp devaluation of local currencies against the Swiss franc (CHF) will be on holders of CHF mortgages and other liabilities. However, the dramatic events over the past few days have also revealed that the countries of the region have made good progress in reducing their foreign exchange exposure, particularly in CHF, a notoriously bad practice.
Today, Swiss franc exposures are reduced and there is little or no danger of a systemic risk, in contrast to the situation at the height of the global financial crisis. The markets will take note once the dust has settled.

Six years ago, the situation was dangerous and nowhere more so than in Hungary where some 97 per cent of mortgages were denominated in Swiss francs. Since then the Hungarian authorities have all but eliminated Swiss franc debt (and other foreign exchange debt), mainly at the expense of banks. The coercive way in which these measures were introduced was criticised, but in hindsight there is relief that Swiss exposures are reduced or gone. And the timing was fortuitous.

By comparison, in Poland the CHF debt problem was never a big issue. Swiss franc mortgages today still represent some 8 per cent of GDP, but are held by a relatively low number of higher earners. The authorities are now looking at targeted measures to deal with the recent shock. But here again there is no systemic risk and the banking system is one of the most robust in Europe.

The ratio of CHF loans in Croatia is comparable at about 7.2 per cent of GDP, though the economy is weaker than in Poland. The parliament in Zagreb last week adopted legislation to keep mortgages denominated in Swiss francs at the pre-cap removal exchange rate level for a year, putting the ensuing losses on the banks, which fortunately are well capitalised.

All the affected countries are looking for ways to ease the burden on a relatively small number of affected households, which are facing hefty additional costs from the appreciation of the Swiss franc. As deep as the shock may be, the situation today is manageable and no longer poses a systemic risk in any of the countries where the EBRD invests.

Today the main danger is the amplified political cost of this issue, which – as the past few days have illustrated – has mainly symbolic significance and thus can still generate panic reactions and make headlines. Due to this amplified political cost it may be the time for solutions to be found, in coordination with the banking industry, to settle the situation once and for all.

Piroska Nagy, EBRD Director for Country Strategy & Policy, European Bank for Reconstruction and Development.This article was first published by the EBRD and can be found at

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