WARSAW — Poland’s banks, along with the government, are bracing for the economic and political impact of a looming EU court decision that could cut the debts of half a million Polish homebuyers.

The Court of Justice of the European Union is expected to rule in September on the legality of a 2008 Polish mortgage linked to the Swiss franc instead of the Polish złoty.

If the Luxembourg judges rule in favor of the debtor, in line with an advisory opinion, it could set a legal precedent costing Polish banks 60 billion złoty (€14 billion) — four times the industry’s annual profits.

Any resulting financial turmoil would put the government, not just the banks, under pressure, if it happens ahead of the October 13 parliamentary election.

The ruling Law and Justice (PiS) party backed off a 2015 campaign pledge to let borrowers convert from francs to złoty on favorable terms after outcry from the financial industry and investors. The government instead encouraged debtors to turn to the courts for relief.

Around half a million Poles have franc mortgages, totaling about €25 billion. Before the 2008 economic crisis, low Swiss interest rates made such loans cheaper than taking loans denominated in złoty. However, the crisis saw investors flee to the safety of the franc — pushing up its value against the złoty and other currencies. A final blow landed in 2015, when the Swiss National Bank abandoned its peg against the euro and let the franc soar.

“The bank adviser explained that Swiss francs are a stable currency, and that because we had joined the EU, soon we’ll be adopting the euro, which would make it all the more beneficial.” — Dorota Pękalska, real estate agent in Warsaw

Because the vast majority of Polish borrowers — called frankowicze — earn in złoty not francs, a rise in the value of the Swiss currency has left them struggling to repay bloated loans.

“It was deceptive. Banks unilaterally set the exchange rate for these loans, and raised them on the eve of repayment,” said Leszek Pawłowicz, vice president of the Gdansk Institute for Market Economics.

Some 8,000 lawsuits have since been lodged in Polish courts, mostly disputing how banks set rates and how they alerted customers to risks. Some law firms are specializing in such cases, advertising through Facebook pages such as “de-franc your loan” or “life without the loan.”

Local court rulings have been inconsistent, with some favoring banks, and others borrowers.

‘A stable currency’

Dorota Pękalska, a real estate agent in Warsaw, is one of those claimants. She told POLITICO that lenders considered her more creditworthy if she borrowed in francs than in złoty, and most of her clients were doing the same.

“The bank adviser explained that Swiss francs are a stable currency, and that because we had joined the EU, soon we’ll be adopting the euro, which would make it all the more beneficial,” she said.

Pękalska said her mortgage was worth 420,000 złoty in 2007. That year, a franc cost about 2.20 złoty. By 2012 (when most banks stopped offering such products) it was about 3.30 złoty, and now it's 4.02 złoty per franc — which means the amount of money she owes the bank has risen much faster than her repayments.

“I simply assumed that there must have been a mistake — that it was not simply a loan, that I had been cheated,” she said.

In the case now before European judges, a Warsaw district court asked for a ruling on a legal technicality: If part of a contract is flawed and the questionable clause is removed, how should the remainder of the agreement be treated?

On May 14, a Court of Justice advocate general gave an advisory opinion that if a Polish court finds an abusive clause in a mortgage contract, it can either void the contract or else keep the agreement (minus the doubtful clause) in force if that favors the client. The CJEU tends to, but doesn't have to, follow the advocate general's opinion.

The opinion set off a storm. With the franc-indexation clause gone, a loan would be converted to złoty at the original rate, but interest would still be calculated using Swiss rates — minus 0.75 percent at the country's current benchmark, while Poland's is 1.5 percent.

‘Dangerous’ precedent

Despite his caution about the fairness of the loans, Pawłowicz warned that if the CJEU follows the advocate general's opinion, it could violate the EU’s law on financial benchmark indexes. In a letter to the European court, he warned that judges should consider the wider implication of such a verdict.

“It will create a precedent that will be dangerous in economic terms as it might threaten the stability of the financial system and lead to a banking crisis in Poland,” he wrote.

During the 2015 electoral campaign, PiS promised that debtors would be able to favorably convert their debts into złotys.

Pawłowicz also warned that a CJEU ruling favoring the frankowicze would be unfair. “We create a situation in which people who chose to take out a [more expensive] Polish złoty loan to avoid exchange rate risk — the responsible ones — end up fooled when those who took riskier loans are given a bonus,” he said.

The potential impact has spooked lenders. The Polish Banking Association estimates that if the court ruling creates a precedent allowing all borrowers to seek conversions, the sector could take a 60 billion złoty hit, forcing banks to raise additional capital.

“It will definitely set off an urgent search for investors, which is not easy in a sector which has had low profitability for a number of years,” said Krzysztof Pietraszkiewicz, president of the banking lobby.

Some banks are more exposed than others. The largest Swiss-franc lenders as a share of their loan portfolios were Bank Millennium (26.2 percent), Getin Noble Bank (23 percent) and mBank (16.9 percent).

The Warsaw Stock Exchange’s banking index has already dropped by almost 10 percent in the past month in anticipation of the ruling, with the most-exposed banks losing a fifth of their market value.

Their situation contrasts with lenders in Hungary, which at one time faced an even bigger Swiss franc problem. Franc-denominated loans once amounted to 70 percent of the country’s household debt, compared with 38 percent in Poland.

The Hungarian government came to a compromise in 2014 — shortly before the Swiss currency soared — by forcing banks to convert €9 billion of loans into forints, with Hungary’s central bank providing liquidity to help banks manage their risk.

No government action

Poland ruled out a Hungarian-style conversion plan. But the delay in tackling the issue has opened the risk of an unfavourable ECJ ruling that could cost more than Hungary's solution.

The ruling also has political ramifications if it arrives ahead of the October 13 election.

PiS dodged the issue — both due to the expense, and because most borrowers are from the urban middle classes, who aren't the party's natural electorate.

During the 2015 electoral campaign, PiS promised that debtors would be able to favorably convert their debts into złotys. However, a number of radical proposals alarmed foreign investors and failed to clear the bar with parliament.

In 2017, party leader Jarosław Kaczyński suggested instead that loan holders “should take matters into their own hands and fight in courts” because “the government cannot take steps which would shake the banking system.”

But now that approach risks shaking the banking system — creating a potent election issue and potentially storing up long-term problems for the economy if banks are forced to rein in lending to build up their capital positions.