Polish Draft Law Restructuring Foreign Currency Denominated and Indexed Loans and the ECB Counterattack
Periodically I will be posting interesting things that have slipped under the radar. This is one of those posts. Apparently Poland has a “draft law” aimed at getting rid of past and future foreign denominated and indexed private debt. This is important as foreign denominated currency loans have been seen as an important part of many of the crises over the last 40 years (at least) and a crucial risk to financial stability. The lure of lower interest rates helps banks manipulate borrowers into taking much more risk and uncertainty than they realize. The ECB says:
“The purpose of the draft law is to facilitate the restructuring of loans denominated or indexed in a foreign currency (hereinafter ‘foreign currency loans’) that were granted after 1 January 2000 for a period exceeding 60 months, even if such loans have been repaid in full or terminated and settled. The draft law also prohibits granting of any future loans involving settlement in a foreign currency”
Under the law any “natural persons” can request to have their loan restructured. If it is, “Any contractual obligation of the borrower denominated in a foreign currency or indexed to a foreign currency is deemed to be null and void”. The loan is then converted into domestic currency.
“The ECB reiterates its comments regarding risks associated with foreign currency loans made in a previous opinion. In particular, in the case of Poland, such risks do not, at present, appear to be of a systemic nature for the financial system and are not seen as representing a particular risk from a financial stability perspective.”
It of course also notes that if you reduce the burden of foreign denominated loans people were tricked into taking that could reduce bank profits and thus have a “ significant impact on the financial stability of the Polish banking sector”. Thus, the ECB comes out firmly on the side of creditors, as one would expect. These smaller, more obscure incidents are a good example of the insidious power of European wide technocratic institutions. For all the problems with the Federal Reserve, it can be reigned in by congress if need be and especially in a situation of ascendant social democratic/leftist politics. It’s legal commentary really is advisory and the Federal Reserve knows to tread carefully when interfering. It is tolerated to the extent it is perceived as giving informed advice and not trying to overtly control or bully congress.. However, for smaller countries like Poland entities like the ECB are able to “throw their weight around” with a pile of seemingly technical objections and overwhelm local politics. For opponents of the law, the ECB is indeed a powerful ally to have. It is also capable of obliquely threatening Poland with retaliation from the EU as a whole, without particularly strong legal basis for its innuendo. I strongly recommend you read the ECB’s 6 page commentary in full.
A note: I caught this because I read this press release from the ECB. In general press releases and speeches from important organizations like the ECB are great reads