- Reuters/Kacper Pempel
The UK will vote Thursday on whether to leave the European Union in a so-called Brexit.
Polls show the Leave and Remain camps in a dead heat.
If Brits vote in favor of leaving, the consequences for investors could be severe: HSBC’s chief economist Simon Wells argues that the near-term economic risks and market impact could include an immediate 15% drop in the pound against the dollar, with an initial fall for the euro too, and a global move to “risk-off,” meaning investors sell stocks in favor of bonds.
But there’s another country that could feel the burn: Poland.
The Central European country is on the edge of a banking crisis thanks to Swiss-franc-denominated mortgages.
From 2006 to 2008, most mortgages that were issued by banks in Poland were denominated in the Swiss franc. And most of the outstanding stock of Swiss-franc mortgages was issued in that period.
This was a popular thing to do because borrowers thought the Polish zloty would continue to strengthen against the Swiss franc. At the time, the Polish currency had appreciated by about 30% against its Swiss counterpart.
But then things reversed course in 2009. The Swiss franc has appreciated dramatically against the zloty since then – which you can see in the chart of the exchange rate.
The government is now trying to put together a proposal for restructuring the Swiss-franc mortgages.
The latest draft’s details were pretty vague, however, and there was no mention of methods for spreading the cost of restructuring over time. Polish President Andrzej Duda will reportedly draft legislation, which is expected to be presented by the end of June.
In light of this situation, a team at BMI Research noted that Brexit could spell bad news.
The team thinks that if the UK votes to leave the EU, the Polish currency will depreciate sharply against the franc as investors retreat to havens. This in turn will increase the cost of the mortgage-conversion plan and once again raise concerns about what the government will do.
The zloty has depreciated by 6.0% against the Swiss franc since March. But the BMI team thinks a Brexit could lead to the franc gaining another 9.0% against the Polish currency.
And here’s what that would mean for Poland, according to BMI:
“In this case, we would expect political pressure on the government to mount as household debt burdens rose, leading to renewed uncertainty over how much of the cost will fall on banks. Brexit induced uncertainty would thus lead to additional losses for equities and government bonds, tightening financial conditions and hurting business confidence. In turn, slowing growth would pressure the fiscal position, raising the possibility of further punitive reactions by the market and European Commission.”
In short, while it’s not the team’s base case scenario, a Brexit could create some problems for Poland and its banking sector.