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EU court's Polish forex loan ruling could spell trouble for zloty investors

The upcoming ruling of the Court of Justice of the European Union on foreign exchange mortgage loans in Poland, anxiously awaited by local banks, could also have significant implications for investors who invest in Polish currency and government bonds, Bloomberg News reported Aug 5.

The EU top court's ruling, analyzing the use of abusive clauses in foreign currency-indexed mortgage contracts, could be announced as soon as September. If the ruling is unfavorable for the banking sector, local lenders could potentially face costs of at least 60 billion Polish zlotys in the form of additional provisions, according to the Polish Bank Association, while ING Bank Śląski SA expects the costs could reach as much as 80 billion zlotys, the newswire noted.

Investor concerns over the outcome of the ruling have already negatively affected WIG Banki, an index tracking banks listed on the Warsaw Stock Exchange, but the Polish zloty and bonds have remained unaffected. However, if the EU court ruling turns out to be negative for local banks, the Polish currency and government bonds will also be hit, Rafał Benecki, chief economist at ING Bank Śląski, was cited as saying.

In a negative scenario, Polish banks may have to curb lending to boost their liquidity positions, which would threaten the Polish economy's growth prospects. Benecki noted, however, that lenders could opt to hold the additional provisions in government bonds, which would be a mitigating factor for the notes.

As of Aug. 5, US$1 was equivalent to 3.86 Polish zlotys.