Unfavourable ECJ guidance is an important systemic risk for the banking sector given the scale of the financial hit for exposed banks. It could challenge the stability of the Polish financial system (if banks were forced to make provisions in a short period of time), meaning a significant risk for both the Polish zloty and Polish government bonds (POLGBs). The main way an unfavourable ECJ verdict will hit POLGBs is by lowering banks’ capacity to fund government borrowing needs and less demand for POLGBs triggering higher yields.
On the other hand, the experience with the first part of the Swiss franc loans saga is that when banks are allowed to create provisions gradually, on a sustainable basis, that limits the systemic risk for the financial sector. In current circumstances, should the ECJ’s opinion prove to be balanced and banks are allowed to add a new provision on a sustainable basis, that would limit the systemic risk.
Also, given the systemic risk for banks and POLGBs, we can imagine local authorities coming up with some mitigating measures in case the ECJ guidance proves to be unfavourable for banks.
It is difficult to estimate to what extent the aforementioned risks have already been priced-in, but it should be noted that so far in 2023 the zloty has underperformed all CEE counterparts. Since 2022, PLN has lost more than 2% against the euro, just over 3% against the Romanian leu and more than 5% against the Hungarian forint. While there are probably other factors involved, the ECJ verdict seems at least partially to be a factor behind such rate developments. As such, guidance that is not strictly negative for banks (e.g. leaving decisions to local courts) may prove to be positive for the zloty and POLGBs.
Finally, there is an economic risk as well. While demand for credit is currently very low (particularly on the household side), it is likely to rebound in the coming years, especially when Poland starts tapping another bulk of EU funding. Therefore, negative ECJ guidance and the difficult capital position of domestic banks could potentially limit credit access in the long run, particularly to consumers and smaller companies.
