Will the Strong Swiss Franc Hurt Banks?
The Swiss franc's safe-haven reputation helped it hit a new high against the euro, but the currency's strength risks hurting those who have relied on its vigor.
Worries about balance sheets in the euro zone, as well as concerns over Ireland's debt and banking sector, led the currency to its new record high of 1.2801 versus the euro Wednesday.
But banks that loaned Swiss francs to customers in Central and Eastern Europe are likely to suffer, analysts warned.
Before 2008, loans in Swiss francs were all the rage in the region, with banks promoting them because the currency was perceived as more stable and predictable than local currencies or the euro.
But now, with the Swiss economy growing 1 percent in the first quarter and a record trade surplus, the Swiss franc is rapidly appreciating and the central bank is unlikely to intervene to cap the rise.
The currency's rise makes it difficult for Central and Eastern Europeans, whose salaries have diminished in real terms and whose currencies fell against the Swissie, to pay back their loans.
Hungary and Poland have the most loans in Swiss francs. But Poland has not experienced a recession since the crisis started in 2007.
The problems "are not so much for Poland but for Hungary," Bartosz Pawlowski, emerging markets strategist at BNP Paribas, told CNBC.
"Still, it poses significant risks for the stability of the financial sector should the currencies depreciate or should the Swiss central bank allow the franc to appreciate more," Pawlowski added.
Hungary Most Exposed
The Hungarian forint weakened to a record low against the Swissie Wednesday, but the country's financial regulator said there was no reason to take specific action. The Polish zloty also weakened over the past six months.
In Central and Eastern Europe, Hungary is the most exposed to Swiss franc lending, which makes up for 39 percent of total private-sector loans and about 60 percent of total mortgages, Cheuvreux EEMEA Economist and Strategist Simon Quijano-Evans wrote in a recent market research.
Poland has around 22 percent of total private-sector loans and 60 percent of mortgages in Swiss francs, according to Quijano-Evans.
In the euro zone, Austrian banks provide 40 percent of credit in Swiss francs , partly to people living in Western Austria who work across the border in Switzerland, his research showed.
The risk of non-performing loans (NPLs) in Swiss francs "is again on the upside, given the strengthening of the Swiss franc and the upside risk of Swiss franc Libor," Quijano-Evans wrote.
Countries in Central and Eastern Europe are on the mend, as the restocking process continues after the deep recession and "this year they should be quite OK," Pawlowski said.
But central banks in those countries – with the exception of Hungary, which needs to boost the forint - should not rush to increase interest rates, as there are still signs of weakness in the euro zone, their most important trading partner, he added.
Data released Wednesday for the second quarter showed the Hungarian economy grew 1 percent while Poland expanded 3.5 percent.