Poland Presses EU for Quick Fix to Expiring Franc Libor Rates

(Bloomberg) -- Poland is urging the European Union to decide what to do with the Swiss franc Libor benchmark that expires at the end of the year and underpins most of the country’s $31 billion pile of foreign-currency mortgages.

The financial stability committee, a body that includes regulators, government and central bank officials, warned late on Tuesday that the Polish financial system could face “significant disruptions” unless a smooth transition from the franc Libor rate is ensured.

The EU’s executive last month ended consultations on its draft regulation that would allow lenders to replace the franc Libor with SARON, a interbank lending benchmark used by Swiss banks, without asking clients for approval. It’s not clear when the commission will announce its decision.

Poland’s disgruntled franc-loan community is opposed to an automatic switch to SARON, which has on average traded about 4 basis points higher than the franc Libor over the past year. The risk for local lenders is that unless the change to SARON is mandatory, it could fuel further lawsuits between Swiss mortgage holders and their banks. 

“Banks may face additional legal challenges as more clients may decide to file lawsuits or reject amendments to their contracts, unless there is a smooth replacement for Libor,” said Marta Czajkowska-Baldyga, an analyst at Haitong Bank in Warsaw. “Such risk is not yet reflected in their share prices.”

Poland has around 430,000 mortgage contracts tied to the franc Libor, by far the most in the EU. They’re a leftover from a boom in foreign-currency lending that peaked shortly before the outbreak of the global financial crisis in 2008 and left many homeowners under water. 

Some 70,000 franc-denominated mortgage holders have sued their banks over abusive clauses in loan agreements, creating the biggest risk for the country’s generally healthy financial industry.

Once the London-based franc Libor is discontinued after fixing scandals over the past decades, Polish banks and their clients will be left without a proper reference rate to calculate interest payments. Hence the commission follows Switzerland’s example and switches to the SARON rate. 

The Swiss settled on the SARON, a secured overnight rate, to replace the London benchmark which was tainted by fixing scandals. Central Bank Governing Board Member Andrea Maechler said in June that the transition to SARON was well on track, with good progress on mortgages in particular.

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