It’s going to be a lean Christmas

Continuing my amateur dramatics (economic variety) from a string of rants on 20 east (below the fox), I thought I’d pop over here and carry on waffling. Carry On films used to be all the rage back in the UK, you know. When I was a lad at any rate.

The Big Picture

I very rarely read The Economist but I had an hour to kill while Zosia trained to be the next Margot Fonteyn and so I bought a copy, tempted by the front page headline – “What will happen to the emerging economies?”. According to them, there are a few countries around us who are probably heading for serious trouble but the good news is that in Poland

“….life should be at worst a bit tougher, rather than downright nasty.”.

Russia needs to work on a few things but is sitting on so much cash that it’s unlikely to be in big trouble or need outside help. Ukraine doesn’t look good at all. Stock market down 80%, currency at 7yr low, economic growth plunging (variation on plummeting!), inflation at 25% and the icing on the cake is political unrest.

Hungary is potentially even worse with public debt at 60% of GDP and a huge amount of debt in foreign currencies gambling on convergence with the Euro. Many Hungarians risk bankruptcy if the forint keeps going south. The IMF and ECB are apparently keen to help though as they consider the Hungarian central bank to be very well run and the authorities have done well in reducing the budget deficit.

Possibly the riskiest positions are held by the Baltic states who have massive current-account deficits. They reckon that the money needed for foreign debt repayments and current-account deficits is 400% of likely year end foreign exchange reserves in Latvia, 350% in Estonia and 250% in Lithuania. The highest such ratios in this region.

For Bulgaria and Romania the question might be of how much support they will get from outside, should they need it. They are, it seems, the ugly sisters of the central/eastern beauty parade and it could be that whatever money is available will go elsewhere. They are also the worst countries in dealing with corruption and organised crime, which doesn’t help.

Poland only gets a small mention in the article and one that suggests it is better than most but not without potential issues. Czech gets no mention at all. “Bursting property bubbles” is a phrase applied to every country.

The Medium Picture

I have a standard line for all the people I know who tell me they have found a job with a developer. It goes something like this – “If you like the smell of better but short term money then be my guest but don’t come back to me when it’s all gone tits up!”. One such recipient of this advice ignored my words and asked if he could meet me for a coffee last week. Of course, he’s looking for a job after the Spanish residential developer he sold out to a couple of years back has closed shop and gone back to the land of tapas and all-day sleeping. I don’t have any jobs, so it was a shortish chat but I noted some interesting figures. They have developments in various places but lets just look at Poznan and Warsaw. Apartments in both developments went up for sale about six months ago. Since then, they have sold roughly six from 380 in Poznan and one from 120 in Warsaw. Has to be said that they are selling slightly ‘upmarket’ apartments for higher than average prices but nevertheless, it’s not an encouraging sign.

The Small Picture

I hate being proved right when it comes to nasty predictions but when I questioned the wisdom of Swiss franc mortgages a few months ago, I didn’t realise how quickly I was going to achieve sagedom! It is now a common occurrence in our office to hear screams of “Oh bugger!” as those mails arrive from the bank telling our staff how much their mortgage payment will be this month. I don’t know the actual figures, but one chap is now having to find an extra 500 PLN a month to pay his mortgage that started out at less than 3,000/month. The more you borrowed, the worse it is and I don’t think it is going to get better in a hurry.

How deep does this go? Well, as every single one of my employees has a Swiss franc mortgage I expect this is quite a widespread problem, certainly amongst those who are paid well above the national average. I asked how many of them had heard from the banker issuing the mortgage something like “Of course, things can change so let’s take a look at what happens if your payments go up by say 30% shall we?”. The answer should be no surprise to anyone. Conversely, they had all been shown the chart that explains how the zloty/franc have enjoyed a special flat-line exchange rate relationship since neolithic times. That’s good then, we have a chart telling us how safe this is going to be but no chart that explores the possible downsides. I’ve told them all to go back to the bank, find the banker who sold the mortgage and ask them what they are supposed to do now!

Still cheaper than a mortgage in PLN – I hear the banks shout. Very possibly, but that’s not the point, is it.

These foreign currency mortgages are a ticking parcel of nastiness.

The Bottom Line

Going to be a tough Christmas season for retailers. Don’t expect any big presents from friends and family, but enjoy it anyway!! Oh, and if what I’m saying above does not apply to you then I have good news. Valentino is opening soon!

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21 thoughts on “It’s going to be a lean Christmas

  1. Bob says:

    Good post as always scatts. You were quite prescient when you wrote the prior piece about real estate and CHF denominated credit. many were lulled into a sense of tranquility by the charts, their banker and their non-understanding of the FX market. They are certainly being punished now. I just feel bad for them as they have simply been trying to live a good life in a ‘place of their own’ and generally work hard to be able to do it.

    It is tough in a market like this. One thing to be said for the US market that by getting a fixed rate mortgage, you knew exactly where you stood for the next X number of years and you were dealing with one currency for income and expenses. Over the past few years it went ‘tits up’ as you say with all kinds of poor credit risk folks who could barely make their payments then see them go up as they got variable rate mortgages – that’s a whole different discussion better done verbally anyway.

  2. David Zieloni says:

    I also read the Economist article – the Russia situation is most interesting – whilst they are sitting on a huge pile of cash this is being eaten currently at a rate of around $30 billion a week in maintaining the strength of the rouble – when you combine declining oil and gas prices (Russia needs around $90 per barrel to break even compared with the current $63), an overvalued currency plus the commitment to take equity stakes in ailing companies/support illiquid banks then the cash is going to run out pretty quickly – we have a repeat of 1998 on the cards.

    The Polish situation is in my opinion worse than the Economist pointed out – you rightly mention that the article made little reference to the housing bubble – there are a heck of a lot of nervous property developers at the moment looking to reneogiate credit lines for projects where there are no buyers – banks to date have been flexible – the lack of interbank lending however means that banks are simply no longer in a position to refinance as they dont have the finance themselves!- the chickens are going to come home to roost as they say and watch as the developers go down followed by some hefty write downs from the banks that were falling over themselves 18 months ago to lend to any Tom, Dick or Harry who had some land and wanted to build the monstrosities called flats we see everyday in Warsaw. There will be a reckoning! Lets watch also for the demise of the overpaid, underqualified yuppy who jumped on the financial services/real estate bandwagon – we are going to see some pretty heavy lay offs of well paid young men and women over the coming months – Swiss bank loans are the least of their worries now!!

  3. scatts says:

    I thought you were talking about me for a minute but then I got to the words ‘yuppy’ and ‘young’. :)

  4. Pawel says:

    Valentino is opening? With mens collection too?:))

  5. My wife and I *just* took out a loan in CHF to pay for our new car. We looked at the CHF data going back four years – every day’s final exchange rate. Basically, when we took the loan it was roughly 1:2.05. I said that, as long as the rate doesn’t exceed 1:2.30 we will be saving money over what the same bank offered us in PLN.

    Obviously there has been a major swing and, we are guessing for the first six months or so of the loan, we are going to be paying over the 1:2.30 magic ratio. The crisis won’t continue forever, especially considering that Poland wasn’t too financially naughty or insane.

    Everyone who took out a loan in CHF did so because the banks couldn’t match it against PLN as you pointed out. I find that sort of irritating and, if I were Polish, slightly humiliating. In the end, unless the Zloty completely goes “tits up”, we’ll have paid out less in CHF than we would have in PLN. Gotta take the long term view.

  6. scatts says:

    Pawel – want me to get you a brochure?

    Brad, as you say, in the long term it may still work out as the best option. It just seems to me to be a good example of the way this whole mess has come about. The country, or banking system, is not able to provide affordable loans in its own currency so rather than just accepting the reality of the situation (or working hard to make them affordable) it just invents a new and dangerous way to load people with debt. I think it’s irresponsible.

    You have a small loan and took account of swings in the FX, many people will be in a very different position.

  7. yellerbelly says:

    I guess the EU funding heading to Poland will help partly stabilise the economy. I assume this money is guaranteed and government spending on infrastructure and transport in the lead up to 2012 should encourage associated private investment. I think this is what happened after the Great Depression in the late 1920s, spending encouraged spending which helped get things moving again.

    3 months ago I was very close to purchasing a property here and would have taken a CHF mortgage. A PLN loan would have been unaffordable for us, but the CHF loan would have been around the same as we are paying now on rent. The only difference being that our rent is fixed and won’t be going up in the next few years (our Landlord is terrified he will lose us, to the point that he increased the rent, then decreased it again to its original level through guilt!). We backed out of the property transaction to ‘wait and see’ what happened on the residential market.

    For the first time since I sold my house in the UK 2 years ago, I’m glad I don’t have a mortgage in PLN, CHF, GBP, EUR or USD!

  8. […] [Polandian] It’s going to be a lean Christmas […]

  9. Anything better than 1 EUR = 4.87 PLN (Mar 2004) means I’m quids in. OK, my mortgage is not going to be 1,094 PLN any more, but then again the zloty will have to collapse by yet another 25% to get back to the rate is was at when that complete loser Leszek Miller was busy screwing up the economy for the benefit of his buddies. (Remember when unemployment was 20.6%? It’s 8.9% now.) Back then, my mortgage was 1,961 PLN. So it all depends when you took out your EUR or CHF denominated mortgage.

    Can anyone think of a country where unemployment has fallen so fast, or where the currency has appreciated so strongly in such a short space of time as Poland’s?

    So there’s wobbles. It will wobble back once the panicking assholes on Wall Street realise the difference between a) Hungary, Latvia and Ukraine and b) Poland.

    Watching the zloty bouncing back today, I regret not changing a wad of pounds into PLN on Friday.

  10. scatts says:

    This kind of stuff from JP doesn’t help. I’m finding it hard to determine exactly where Poland stands right now. There are too many conflicting reports.

    According to a report issued by JP Morgan yesterday, “The main currency in which we are noticing weakness is the zloty. (…) Poland seems to have a poorer safety pad than Hungary and in case of a crisis it would be left almost with no reserves.” According to the bank, Poland’s short term external debt grew very significantly recently, and it estimates that Poland will have to repay a sum of $96.3 billion next year. Meanwhile, currency reserves amount to $59.5 billion. According to JP Morgan, Poland could borrow $12.8 billion from the IMF and postpone 50% of the payment. However, even in such a case the reserves will amount to $4.5 billion, while Hungary would be left with $14 billion and the Czech Republic with $23.7 billion. “In case of a crisis, Poland would have the largest problem with raising finance,” reads the report. Domestic economists are outraged with the report and ensure investors that the data used in the report is outdated and not all options are taken into account. “This is very unprofessional and not worth analysis,” said Societe Generale chief economist, Jaroslaw Janecki.
    (Rzeczpospolita, p. B1) A.K.

    I’d die to have your cost of housing, Michael, a thousand or so a month. Luxury! Mine is quite a bit higher although as the zloty weakens it is effectively costing me less. Where we live they always denominate rents in Euro because 95% of the tenants are company execs on the firm’s expense. I refused to accept this, being a humble private guy paying everything myself, and so have rent fixed in PLN. I also negotiated a reduction in the rent from what they were asking so with FX as it is I’m paying about 2,000 PLN a month less than I might otherwise have been. Although the amount I pay each month is the same, I still feel quite good about this. ;)

    Oh! Conversely – I regret not changing a wad of PLN into GBP when it was @ 4! Would have been cheap spending money for those trips back to see family & friends.

  11. scatts says:

    And another article from today:

    Poland put a good face to a cut in the outlook to its sovereign rating, saying a ‘stable’ outlook spoke well to fundamentals in the current environment, a top Finance Ministry official said.

    There remains no reason for Poland to revise its 2009 GDP forecast down yet, she added in reiteration of the ministry mantra.

    “I take the S&P decision as positive information,” deputy Finance Minister Katarzyna Zajdel-Kurowska told reporters Monday.

    “If the agency, after an exact review of our macro and fiscal position, has decided on a stable outlook for our rating, this means that foundations of our economy are strong.”

    The comment comes after S&P cut the outlook on Poland’s rating from positive to stable.

    S&P’s declaration of stable outlook should put paid to select talk of Poland’s would-be vulnerability in current conditions, Zajdel- Kurowska assured.

    “Some of the negative news we hear suggesting that our economy could have any problems has not been confirmed by the agency,” she said.

    “Perhaps the change in outlook for the rating results from the rise in the C/A gap and the somewhat lower rate of economic growth,” she added.

  12. guest says:

    sorry for the google translation !


    htt p://

    The Bank tried to drive to Poland in crisis

    The U.S. bank tried to drive Poland in a crisis?

    U.S. bank JP Morgan to giant representing such people and such money, that the mighty listen to his opinion, affect the fate of the world. The question of how far the bank discouraged investors to Poland. He wrote in the report is that when the crisis starts to plunge Europe, gold will suffer the most. Some analysts say that someone tried in this way to earn spadkach our currency.

    “The main currency in which we see out of weakness, it is gold. Poland appears to have less cushion than Hungary and in the event of a crisis would be almost without reserve” – JP Morgan analysts wrote in his report, the excerpts published today, “Rzeczpospolita”.

    Is a strong word. The more that Hungary uchodziły for the country, which pogrąża in recession. It was to be the forint currency, which need assistance the International Monetary Fund. Poland would be compared to other island countries in the region, which will save the financial tornado.

    Why people bank JP Morgan write such things? “This is very unprofessional and nielicujące development analyst with dignity” – said “Rzeczpospolita” Jaroslaw Janecki, chief economist Societe Generale.

    False arguments

    Nielicujące with dignity is mainly to the fact that the arguments cited by JP Morgan are debatable, and some argue that even false. JP Morgan says that Poland has a gigantic short-term external debt, which itself does not handle (in the next year, we have apparently repay 96.3 billion USD).

    Former Finance Minister Miroslaw Gronicki argues that the data are inflated. He said “Rzeczpospolita” that analysts took into account the total debt, including debt businesses. He added that the report does not include the possibility that Poland is in the payment of this debt. The point is that we can defer repayment of more than 50 percent of the debt.

    In an era of strong fluctuations in the currency market and turbulence in the stock market, the report looks extremely suspicious. Commonly known fact that the rapidly falling and rising quotations, to earn the spekulanci.

    After a few deflections on our currency, the zloty odrabia losses. Today climb to the top. It is not known, however, how long will it take to the trends. Markets behave nieprzewidywalnie.

  13. guest says:

    ps: gold will suffer the most = should mean POLAND will suffer the most.

    damn google translator.

  14. scatts says:

    That google translator is a lot of fun!

  15. island1 says:

    Food for thought. An hour-long documentary on some emerging concepts about the behaviour of stock markets, economies, and hemlines. It gets more relevant as it goes on:

  16. scatts says:

    Interesting video but then I always enjoy things like that. I’m not sure what to believe. I think man is always trying to apply a pattern to things and sometimes we are guilty of stretching a point. Nevertheless, there may well be something in it and probably long after I’m dead things like this will be hugely more significant than they are now.

  17. scatts, it is legitimate to assume you have more information:P

  18. Pawel says:

    the last comment was me:) re: Valentino

  19. kookimebux says:

    Hello. And Bye. :)

  20. […] 15, 2009 in Feature | Tags: Valentino Warsaw | by scatts Back in October I was talking about Valentino “opening soon” in Warsaw. For anyone who likes spending six gazillion zloty […]

  21. […] in October I was talking about Valentino “opening soon” in Warsaw. For anyone who likes spending six gazillion zloty […]

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